Why has the Recovery in Employment in the US been so Slow?

The jobs report from The Bureau of Labor Statistics this past Friday is not good reading. The economy added about 115,000 workers, the slowest increase in 6 months. To make matters worse, over 40% of the unemployed have remained out of work for at least six months. The unemployment rate did drop a notch, but this was because many discouraged workers left the labor force. In fact, the recovery is the slowest in the post World War II period. No single factor explains this slowness, but a combination of several explains most of the slow recovery.

Recoveries after major financial crises are notoriously slow. This is well documented in the book This Time is Different: Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth Rogoff. The authors study many financial crises, and the recoveries from these crises. Recoveries are slow partly because the dire nature of a financial situation is not recognized quickly, and policies that try to end a crisis are usually implemented slowly.

While slow recoveries from major financial crises are common, employment would have increased considerably more rapidly, and unemployment would have fallen much faster, were it not for several factors special to this recovery. Scott Baker, Nicholas Bloom and Steven Davis have studied changes in economic policy uncertainty since 1985, and have constructed an index of the degree of economic policy uncertainty during the past 26 years (see their “Measuring Economic Policy Uncertainty”, October 2011). The index spikes sharply after major events, such as Black Monday’s stock market fall in 1987, the 9/11 attack, and the beginning of the 2nd Gulf War. Economic policy uncertainty according to their index also rose to extremely high levels during the past several years, especially during the 2010 midterm election, the debate over the stimulus package in 2009, the Lehman bankruptcy and TARP legislation in 2008-9, and the Eurozone crisis and the US debt ceiling disputes in 2011.

These shocks to the degree of uncertainty about the economy and economic policy significantly affected hiring and investments by American businesses.

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