Recessions and Local Labor Market Hysteresis

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