The Labor Market in the Aftermath of the Great Recession

May 17 and 18, 2013
Alexandre Mas of Princeton University and David Card, University of California at Berkeley, Organizers

Joseph Altonji and Lisa Kahn, Yale University and NBER, and Jamin Speer, Yale University

Cashier or Consultant? Entry Labor Market Conditions, Field of Study, and Career Success

Altonji, Kahn, and Speer analyze outcomes of college graduates as a function of the economic conditions they graduated into and the skill requirements of their field of study. They combine multiple datasets with information on earnings and field of study for U.S. college graduates graduating between 1976 and 2011. This provides coverage of multiple business cycles and larger sample sizes than the typical cohort-based analyses in this literature. They categorize college majors by indicators of skill in the majors, predominantly the average earnings premium. They then measure earnings, wage, employment, occupation, skill level, and educational attainment outcomes across graduation cohorts and major skill level. They find that early careers are disrupted by poor labor market conditions: a large recession at the time of graduation reduces earnings and wages by roughly 9 percent and 13 percent (respectively) in the first year, and reduces the probability of full-time employment by 11 percentage points. These effects are fairly short-lived, fading out over the first five years of a career or so. They also find that the earnings gap across college majors widens in recessions: a typically high-earning major increases his or her earnings advantage by one third when graduating in a bad recession, and this effect remains large for the first seven years after college graduation. There is some evidence of small, positive educational attainment effects even among low-return majors who are graduating into a less vibrant economy, but the authors find no effects on occupation quality. They also determine that differential cyclicality of college major cannot account for their findings. They compare their earnings and wages effects across recessions and find that overall earnings losses from poor entry conditions are substantially larger for graduates in the 2001 and 2007-9 recessions than in other periods, and these earnings losses are more evenly dispersed across college majors.

Jesse Rothstein, University of California at Berkeley and NBER

Disability Insurance and the Business Cycle?

Disability insurance (DI) applications and awards are countercyclical. One possible explanation is that unemployed individuals who exhaust their Unemployment Insurance (UI) benefits use DI as a form of extended benefits. Rothstein exploits the haphazard pattern of UI extensions in the Great Recession to identify the effect of UI exhaustion on DI application, using both aggregate data at the state-month level and microdata on unemployed individuals in the Current Population Survey. He finds no indication that expiration of UI benefits causes DI applications. His estimates are sufficiently precise to rule out effects of meaningful magnitude.

Giuseppe Moscarini, Yale University and NBER, and Fabien Postel-Vinay, University of Bristol

Did the Job Ladder Fail after the Great Recession?

Workers often quit jobs to take other offers, and they tend to move from smaller to larger employers who offer more generous terms. Employment reallocation up this job ladder has important aggregate implications for productivity. It also has a distinct cyclical pattern. When unemployment is low, firms find it difficult to hire. Large firms can keep expanding by poaching workers from smaller firms; these firms have a hard time hiring and retaining workers, and stall. When a recession hits, large firms, that were less constrained, have more employment to shed than small firms. As the recovery begins, but unemployment is still high, small firms are less constrained and lead in job creation. Job-to-job quits are procyclical, and most unemployed workers resume climbing the job ladder from the bottom, upgrading in larger numbers when the labor market tightens and poaching picks up again. Moscarini and Postel-Vinay examine the Great Recession (GR) and its aftermath under the lens of this dynamic job ladder model. They show that many of these features were present in the GR, but small firms were less resilient than in previous recessions. The dramatic drop in attrition through quits to other firms and the rise in job applications from unemployment led small firms to freeze hiring. As a result, after the GR, worker flows up the job ladder slowed to an unusual extent, and are likely to remain slow going forward. The authors also show that the job ladder model does a remarkable, albeit not perfect, job at fitting monthly observations on net and gross worker flows across firms of different sizes in the Job Openings and Labor Turnover Survey (JOLTS). Their model provides sufficient restrictions to generate an estimate of hiring effort by firm size category. This estimate differs significantly from JOLTS vacancy rates by size, which are not entirely consistent with JOLTS gross worker flows by size.

Marianne Bitler, University of California at Irvine and NBER, and Hilary Hoynes, University of California at Davis and NBER

The More Things Change, the More They Stay the Same: The Safety Net, Living Arrangements, and Poverty in the Great Recession

Bitler and Hoynes examine the historical relationship between poverty and business cycles and ask whether that relationship changed significantly during the Great Recession. They first explore the mediating role of six core safety net programs -- Food Stamps, cash welfare (AFDC/TANF), the Earned Income Tax Credit, Unemployment Insurance (UI), and disability benefits (Supplemental Security Income and Social Security Disability Income) -- in buffering families from negative economic shocks, analyzing high quality administrative data on participation, in terms of caseloads and in total. They also examine the role of the private safety net, looking at how living arrangements, for example the propensity to double-up or for young adults to be living at home, respond to shocks and how these choices vary over time and across cycles. They focus on the non-elderly, given their greater connection to fluctuations in the labor market. Throughout the analysis, they identify the impact of the business cycle, using variation across states in the timing and severity of cycles, with a state panel data model. They measure the economic cycle using the state unemployment rate. They find that the relationship between unemployment and official cash poverty remained remarkably consistent with historical patterns during the Great Recession. However, a more expansive alternative poverty measure shows that, if anything, the cyclicality of poverty increased in the current period. During the Great Recession, Food Stamps and UI exhibit adjustments that are entirely consistent with their behavior during previous historical cycles. The most dramatic change in the safety net, and the one which is evident in the administrative data and the CPS analysis in this study, is the post-welfare-reform decline in cash assistance for providing protection for the most disadvantaged. Changes in living arrangements are modest and for the most part are in line with prior cycles. Thus, on balance, despite the attention to the apparent differences in the response of the private and social safety nets in the Great Recession, the relationship between cycles and economic well-being are as would have been predicted from the historical patterns.

Thomas Lemieux, University of British Columbia and NBER, and Florian Hoffmann, University of British Columbia

Unemployment in the Great Recession: A Comparison of Germany, Canada and the United States

Lemieux and Hoffmann look at the surprisingly different labor market performance of the United States, Canada, and Germany in the Great Recession of 2008-9. Unlike real GDP, which dropped and recovered in a similar fashion in all three countries, the unemployment rate followed a very different path. It barely increased in Germany, increased and remained at stubbornly high levels in the United States, and increased moderately in Canada. More recent data also shows that, unlike in Germany and Canada, the U.S. unemployment rate remains largely above its pre-recession level. The authosr explore several possible explanations for this phenomenon, and conclude that large employment swings in the construction sector linked to the boom and bust in U.S. housing markets are a very important factor behind the different labor market performance of the three countries during the Great Recession. Looking at more recent years also suggests that the strong GDP performance of Germany since 2009 is another important explanation for the continuing decline in unemployment in that country.

Till von Wachter, Columbia University and NBER

The Effect of the Great Recession on Older Workers

Edward Lazear and Kathryn Shaw, Stanford University and NBER, and Christopher Stanton, University of Utah

Making Do with Less: Working Harder During Recessions

There are two obvious possibilities that can account for the rise in productivity during recent recessions. The first is that the decline in the workforce was not random, and that the average worker was of higher quality during the recession than in the preceding period. The second is that each worker produced more while holding worker quality constant. Lazear, Shaw, and Stanton call the second effect "making do with less" -- that is, getting more effort from fewer workers. Using data spanning June 2006 to May 2010 on individual worker productivity from a large firm, it is possible to measure the increase in productivity due to effort and sorting. For this firm, the second effect - that workers' effort increases - dominates the first effect - that the composition of the workforce differs over the business cycle.

Kory Kroft, University of Toronto; Fabian Lange, McGill University; Matthew Notowidigdo, University of Chicago and NBER; and Lawrence Katz, Harvard University

Long-Term Unemployment and the Great Recession: The Role of Composition, Duration Dependence, and Non-Employment

Kroft, Lange, Notowidigdo, and Katz explore the extent to which composition, duration dependence, and non-employment can account for the sharp increase in long-term unemployment (LTU) during the Great Recession. Long-term unemployment increased for all groups, and shifts in the observable characteristics of the unemployed do not go very far in explaining the rise in LTU. In particular, they show that compositional shifts in demographics, occupation, industry, region, and the reason for unemployment jointly explain very little of the observed increase in LTU. Using panel data from the CPS for 2002-8, the authors calibrate a matching model that allows for transitions between employment (E), unemployment (U), and non-employment (N), as well as duration dependence in unemployment. They model the job finding rates for unemployed and non-employed individuals, and use observed vacancy rates as well as the transition rates from E-to-U, E-to-N, N-to-U, and U-to-N as the "forcing variables". The calibrated model can account for almost all of the increase in LTU and much of the observed outward shift in the Beveridge curve between 2009 and 2012.

Erling Barth, University of Oslo and NBER; Jim Davis, Bureau of the Census; and Richard Freeman, Harvard University and NBER

Dispersion of Employment Growth and Wages among Establishments in Recession and Recovery

Lucia Foster and Cheryl Grim, Bureau of the Census, and John Haltiwanger, University of Maryland and NBER

Reallocation in the Great Recession: Cleansing or Not?

The high pace of output and input reallocation across producers is pervasive in the U.S. economy. Evidence shows this high pace of reallocation is closely linked to productivity. Resources are shifted away from low productivity producers towards high productivity producers. While these patterns hold on average, the extent to which the reallocation dynamics during recessions are "cleansing" remains an open question. That is, are recessions periods of increased reallocation that move resources away from lower productivity activities towards higher productivity uses? Or, are they periods when the opportunity cost of time and resources is low, implying that recessions will be times of accelerated productivity enhancing reallocation? Prior research suggests the recession in the early 1980s is consistent with an accelerated pace of productivity enhancing reallocation. Alternative hypotheses highlight the potential distortions to reallocation dynamics in recessions. Foster, Grim, and Haltiwanger note that such distortions might arise from many factors including, for example, distortions to credit markets. Some have suggested that these distortions are sufficiently large to attenuate the cleansing effect, or even to shift resources towards less productive activities. The close connection between the financial crisis and the Great Recession raises interesting questions about the importance of this hypothesis in the recent period.

Paul Beaudry, University of British Columbia and NBER; David Green, University of British Columbia; and Benjamin Sand, York University

The Great Reversal in the Demand for Skill (NBER Working Paper No. 18901)

What explains the current low rate of employment in the United States? While there has been substantial debate over this question in recent years, Beaudry, Green, and Sand believe that considerable added insight can be derived by focusing on changes in the labor market at the turn of the century. In particular, they argue that around the year 2000, the demand for skill (or, more specifically, for cognitive tasks often associated with high educational skill) underwent a reversal. Many researchers have documented a strong, ongoing increase in the demand for skills in the decades leading up to 2000. These researchers demonstrate a decline in that demand in the years since 2000, even as the supply of high-education workers continues to grow. They go on to show that, in response to this demand reversal, high-skilled workers have moved down the occupational ladder and have begun to perform jobs traditionally performed by lower-skilled workers. This deskilling process, in turn, results in high-skilled workers pushing low-skilled workers even further down the occupational ladder and, to some degree, out of the labor force all together. In order to understand these patterns, they offer a simple extension to the standard skill biased technical change model that views cognitive tasks as a stock rather than a flow. They show how such a model can explain the trends in the data that they present, and offer a novel interpretation of the current employment situation in the United States.

Daron Acemoglu and David Autor, MIT and NBER; David Dorn, CEMFI; Gordon Hanson, University of California at San Diego and NBER; and Brendan Price, MIT

Import Competition and the Great U.S. Employment Sag of the 2000s

Even before the Great Recession, U.S. employment growth was unimpressive. Between 2000 and 2007, the economy gave back the considerable jump in employment rates it had achieved during the 1990s, with major contractions in manufacturing employment being a prime contributor to the slump. The U.S. employment "sag" of the 2000s is widely recognized but poorly understood. Acemoglu, Autor, Dorn, Hanson, and Price explore an under-appreciated force contributing to sluggish U.S. employment growth: the swift rise of import competition from China. They find that the increase in U.S. imports from China, which accelerated after 2000, was a major force behind recent reductions in U.S. manufacturing employment and that through input-output linkages with the rest of the economy, this negative trade shock has helped suppress overall U.S. job growth.

Michael Elsby, University of Edinburgh; Donggyun Shin, Kyung Hee University; and Gary Solon, Michigan State University and NBER

Wage Adjustment in the Great Recession

As of a quarter-century ago, the conventional wisdom among macroeconomists was that real wage rates were more or less non-cyclical, and many macroeconomic models described wage inflexibility as a key contributor to cyclical unemployment. Since then, however, numerous empirical studies based on microdata for workers have found that real wages are substantially pro-cyclical. This pro-cyclicality had been obscured in aggregate wage statistics, which tend to give more weight to low-skill workers during expansions than during recessions. Most of the U.S. microdata-based literature is based on data extending no later than the early 1990s, so an obvious question is what the cyclical wage patterns have been more recently. Most importantly, how have wages behaved during the Great Recession? Is there reason to think that wages responded especially sluggishly during this downturn and that stickiness of wages contributed to the Great Recession's unusually high unemployment? Elsby, Shin, and Solon address these questions with data for both the United States and Great Britain.