Jobless Recoveries: Stagnation or Structural Change?

Abstract

Within the existing literature on jobless recoveries a bit of a puzzle is emerging. On the one hand there is evidence of dynamic structural change including off-shoring/globalization and skill-biased technological advances. Other studies emphasize a less dynamic economy with slower growth, reduced labor market fluidity, a decline in startup activity, and even secular stagnation. This study exploits variation among US states to assess the degree that economic stagnation and/or important structural changes in the economy contribute to the recent phenomenon of jobless recoveries. We find empirical evidence to support both the stagnation and structural change theories of jobless recoveries. On the stagnation side, we find evidence that weak macroeconomic conditions are significant predictors of jobless recoveries. But even after controlling for the vigor of an economic recovery at the state and national level, we find strong evidence that links jobless recoveries to job polarization. Our results therefore suggest that structural change in labor demand is likely causing jobs in the middle of the skill distribution to be disproportionately slashed during recessions, and to the extent that these jobs are being automated, firms have less of a need to rehire during the expansion yielding a jobless recovery.

Keywords: Business Cycles, Recessions, Jobless Recoveries, Job Polarization, Unemployment

JEL Classification: E32, E24