Whatever Happened to the Business Cycle? A Bayesian Analysis of Jobless Recoveries

Abstract

During the typical recovery from U.S. postwar period economic downturns, employment recovers to its pre-recession level within months of the output trough. However, during the past two recoveries, employment has taken up to three years to achieve its pre-recession benchmark. We propose a formal empirical model of business cycles with recovery periods to demonstrate that the past two recoveries have been statistically di¤erent from previous experiences. We …nd that this di¤erence can be attributed to a shift in the speed of transition between business cycle regimes. Moreover, we …nd this shift results from both durable and non-durable manufacturing sectors losing their cyclical characteristics. We argue that this …nding of acyclicality in post-1980 manufacturing sectors is consistent with previous hypotheses (e.g., improved inventory management) regarding the reduction in macroeconomic volatility over the same period. These results suggest a link between the two phenomena, which have heretofore been studied separately.