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How will unemployment fare following the recession?

Edward Knotek () and Stephen Terry ()

Economic Review, 2009, vol. 94, issue Q III, 5-33

Abstract: Since the start of the recession in December 2007, the U.S. unemployment rate has risen more than four percentage points. Similar sharp increases in unemployment have occurred in other severe recessions, such as those in 1973-75 and 1981-82. In the aftermath of those severe recessions, the economy rapidly recovered and unemployment quickly declined. ; Will unemployment behave similarly following this recession? One reason why unemployment may not fall as quickly this time is that the labor market has changed substantively since the early 1980s. In the two recoveries since then, not only did unemployment continue to climb, but it remained persistently high in what have been termed \\"jobless recoveries.\\" To the extent that labor market changes were responsible for these jobless recoveries, unemployment following the current recession may also be slow to recover. ; A second reason unemployment may not fall quickly this time is that the recession has been coupled with a systemic banking crisis. While the United States has not had many instances of similar crises in the past, evidence from the experiences of other countries may shed light on how future unemployment in the United States is likely to behave. In general, the international data reveal large and persistent increases in unemployment in the aftermath of such events. ; Knotek and Terry examine these factors and quantify their potential implications for the future U.S. unemployment rate. Their analysis suggests that recent trends in labor markets, combined with the presence of a banking crisis in the current recession, raise the likelihood that unemployment will recover much more slowly from this recession than past episodes of severe recession may suggest. Moreover, such a slow recovery has the potential to raise important questions for policymakers, including the level of unemployment consistent with their goals.

Date: 2009
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