Recessions and Local Labor Market Hysteresis

Upjohn Institute Working Paper 20-325, 2020

79 Pages Posted: 3 Jun 2020

See all articles by Brad Hershbein

Brad Hershbein

W.E. Upjohn Institute for Employment Research

Bryan A. Stuart

George Washington University - Department of Economics

Date Written: April 30, 2020

Abstract

This paper studies the effects of each U.S. recession since 1973 on local labor markets. We find that recession-induced declines in employment are permanent, suggesting that local areas experience permanent declines in labor demand relative to less-affected areas. Population also falls, primarily due to reduced in-migration, but by less than employment. As a result, recessions generate long-lasting hysteresis: persistent decreases in the employment-to-population ratio and earnings per capita. Changes in the composition of workers explain less than half of local hysteresis. We further show that finite sample bias in vector auto-regressions leads to artificial convergence, which can explain why some previous work finds no evidence of hysteresis in employment rates.

Keywords: Recessions, Hysteresis, Demand Shocks, Local Labor Markets, Event Study

JEL Classification: I24, I26, J24, J31

Suggested Citation

Hershbein, Brad and Stuart, Bryan A., Recessions and Local Labor Market Hysteresis (April 30, 2020). Upjohn Institute Working Paper 20-325, 2020, Available at SSRN: https://ssrn.com/abstract=3593345 or http://dx.doi.org/10.2139/ssrn.3593345

Brad Hershbein (Contact Author)

W.E. Upjohn Institute for Employment Research ( email )

Bryan A. Stuart

George Washington University - Department of Economics ( email )

United States

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