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 prerecession level within months of the output trough. However, during the past two recoveries, employment has taken up to three years to achieve its prerecession benchmark. We propose a formal empirical model of business cycles with recovery periods to demonstrate that the past two recoveries have been statistically different from previous experiences. We find that this difference can be attributed to a shift in the speed of transition between business cycle regimes. Moreover, we find this shift results from both durable and nondurable manufacturing sectors losing their cyclical characteristics. We argue that this finding 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.

What Explains the Recent Jobless Recoveries?

“…19. Even though the AR coefficients did not change significantly, and the cyclical component still plays a very important role, if one were to look only at the growth rates of employment, the results presented here would lead to a "loss of cyclicality" in the employment growth series, which is in line with the findings of Engemann and Owyang (2010). 20.…”

“…See, inter alia, Berger (2012). An exception is the paper by Engemann and Owyang (2010), who estimate a univariate smooth transition model for employment, both aggregate and sectoral, where they allow the break date in the speed of adjustment of employment and the dynamics of employment to be endogenous. Their estimated break dates for aggregate employment and employment in most sectors coincide with the start of the Great Moderation, implying that treating the break as exogenous and occurring around 1984 is a plausible assumption.…”

“…It is, however, important to note that the first subsample includes eight recessions, and the second only three. Several empirical studies, most notably Engemann and Owyang (2010), start their samples in 1960. The results presented here are robust when a shorter subsample is used that starts in 1960 and are discussed in much more detail in Section 5.…”

“…The approach taken in this study is somewhat similar in spirit to the empirical approach of Engemann and Owyang (2010), who use a univariate model to explore whether the speed of adjustment of employment has changed over time and link changes in the speed of adjustment to the strands of the theoretical literature. However, the model here is different from Engemann and Owyang's because I directly incorporate the intensive margin and I identify transitory demand shocks based on restrictions from the theoretical models.…”

A New Approach to the Study of Jobless Recoveries

“…The third candidate cause we study (and perhaps most salient among our list) is the advent of a much documented decrease in the volatility of aggregate economic variables; a shift known as the “great moderation.” Authors like Engemann and Owyang (), Faberman (), and DeNicco and Laincz () have presented convincing evidence showing the emergence of jobless recoveries at the aggregate level coincides with the beginning of the great moderation. Despite the evidence they provide, however, very few explanations can be found in the literature as to why this could be the case.…”