Economists say jobless recoveries here to stay, but a mystery why

The Washington PostSeptember 21, 2013 

The U.S. economy just hasn’t looked like its old self lately, especially when it comes to regaining the jobs lost during a recession. It looks a lot more like 1980s-era Europe – slow to rebound and hire after a downturn, leaving workers to flail for years in a weak job market.

The United States is stuck in its third consecutive “jobless recovery,” stretching back to the rebound from the 1990 recession. And Americans might need to get used to them: A major new study from economists at the University of Texas at Austin and the University of California at Berkeley suggests that vintage Europe is the new American normal for recessions and recoveries.

But even after an exhaustive series of tests, the economists still can’t explain what has gone wrong.

In their research, Olivier Coibion of Texas and Yuriy Gorodnichenko and Dmitri Koustas of Berkeley focused on what they describe as “the rising persistence of U.S. unemployment,” which is to say, why it’s taking so much longer of late for the economy to add back jobs wiped out in a recession.

It was a process of elimination. First, they determined that recessions caused by financial shocks, such as the crisis that began in 2008, are no more likely to cause slow employment rebounds than any other kind of recession. Second, they found that the federal government and Federal Reserve could have speeded up the rebounds from the past three recessions if they had stimulated the economy more aggressively, though it would not have been nearly enough to return the U.S. economy to its historical quick-recovery patterns.

Finally, the team tested a wide range of demographic, economic and cultural factors that could have changed over time and influenced the way the nation recovers. They examined the relationship between those factors and a set of regional economies in the United States, Canada and Western Europe to see which factors are associated with slower rebounds.

Lack of trust

A few results popped out. Social trust has declined in America, meaning people are less likely to say they trust each other and society and more likely to say it’s all right to claim government benefits, even if they don’t qualify for them. That change of view appears to be hurting the job market.

That’s right: The research shows that unemployment is higher because people trust one another less.

“Social networks are a common way people find jobs, and the social isolation and distrust we observe are likely associated with a decline in these traditional networks,” the authors said in an email interview.

That trust effect, however, was canceled out by the graying of the U.S. population, they found. An older populace is associated with lower unemployment after a recession, the authors found; that’s probably because older workers are more likely to drop out of the labor force if they lose their jobs by retiring early, and thus aren’t counted as unemployed for very long.

Several other factors, including that few workers are moving to new areas to find jobs, also failed to explain the shift.

The end result of the research was more mystery. Declining trust and less aggressive fiscal and monetary policy seem to be prolonging the recovery time in the job market. Or they would be, if the rise in the older population wasn’t doing the exact opposite.

No definitive answer

Something else must be going on, the authors reasoned. But what?

“We were able to rule out a number of potential explanations, including some prominent ones, so we view this as making some progress toward resolving this riddle,” the economists said in the email. “But it’s clear that we don’t have a definite answer yet; it will require more careful analysis of additional possible explanations.”

Still, Coibion, Gorodnichenko and Koustas said their research offers some lessons for the lawmakers who will probably face more “jobless recoveries” down the line. The most concrete is to scrap the idea of “timely and temporary” fiscal stimulus.

“Future administrations should, when facing recessions, have concrete plans to deal with the fact that downturns are likely to be more protracted in the foreseeable future,” they said in the email. That probably means fewer short-lived tax breaks and more long-running investment projects.

In the meantime, the economists said, they’d like to see “concerted efforts on the part of many economists” to solve this slow-recovery riddle.

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