Jobless recovery in the 2001 U.S. recession: causes and explanations

Jobless Recovery

JAFLOR

Why Jobless Recovery?

The economic slowdown, according to the National Bureau of Economic Research (NBER), that the United States experienced in 2001 transpired for eight months between March and November (Bernanke, 2003). Many Americans witnessed a modest decline in the economy, which, however, also started to pick up moderately after eight months.

Despite of the moderate performance of the economy in recovering from the period of recession, the labor market showed a very slow improvement. This is the reason why the economists describe the recovery following the March-November economic downturn a "jobless recovery." Other sectors of the economy are starting to improve and are making progress while many Americans remained jobless. There has been a weak labor market during the period when the economy is resuming growth.

Five Possible Explanations for the Slow Recovery of Labor (From Bernanke's speech)

Bernanke, in his speech, mentioned several possible explanations for the slow recovery of the labor market. Following is a brief discussion of several of them.

Some have suggested that firms over-hired during the late 1990s boom, implying that the levels of employment seen before the recession peak in March 2001 were not sustainable (Bernanke, 2003).

Companies hired a large number of employees and workers during the late 1990s. Hence, a comparison of unemployment rate before and after the 2001 recession manifests a considerable level of difference.

Some observers have pointed to increases in benefit costs to employers as a factor retarding hiring (Bernanke, 2003).

Statistics have shown that many companies incurred an increase in the benefit costs between September 2001 and September 2003. Hence, employers choose to make greater use of their existing employees rather than hire new ones.

An elevated level of political and economic uncertainty has made firm managers more hesitant to expand their businesses (Bernanke, 2003).

The economic and political instabilities are said to be another negative factor for unemployment. Problems such as the September 11 attack, and the Iraq and Afghanistan wars prevent businesses to expand and invest more, which consequently prevents the need for more workers.

Increased pace of structural change in the U.S. economy (Bernanke, 2003).

Due to structural change, several industries decline. Thus, causing the loss of many jobs.

The remarkable increase in labor productivity (Bernanke, 2003).

Productivity increased from an annual 2.5% in the late 1990s into 4.5% after the 2001 recession (Bernanke, 2003). This increase however did not cause employers to hire more workers. They instead use the high-technology equipments for more productivity and they demand for more output from existing workers.

Increase Pace of Structural Change in the U.S. Economy

Two types of adjustments can be applied by businesses during economic recessions. These are the cyclical and structural unemployment. In a cyclical unemployment, businesses recall laid-off workers upon their recovery from a recession. Unemployment in a cyclical adjustment is basically temporary. In a structural unemployment, on the other hand, jobs are permanently eliminated. This is what the United States' economy currently experiences, an increase in pace of structural change. Groshen and Potter indicated the following three reasons for this.

First, the structural decline observed in many industries might be a reaction to a period of overexpansion

Second, improved monetary and fiscal policy may have reduced cyclical swings in employment, leaving structural shifts as the prevailing form of change.

Third, innovations in firm management may be promoting a structural shift toward leaner staffing.

The structural change theory is another possible cause of U.S.'s current "jobless recovery." Because those who loss their jobs during the 2001 recession are victims of structural change, and structural adjustments prevailed in many companies, U.S. is now experiencing a high rate of unemployment. To solve this, and as Groshen and Potter suggest, an increase in financing must be provided for businesses who undertake riskier ventures. This will help businesses reduce worries regarding costs for their new ventures, will give them courage to undertake new business ventures, which in the end will result to an increase in demand for more workers.