The deep recession of 2007-2009 dealt no more permanent damage to the U.S. labor market than other recent downturns, according to a research paper prepared for a central banking conference that disputed the notion it left unusually heavy economic scars.
Continue Reading Below
The paper, which will be presented on Saturday to a some of the world's top central bankers and economists, analyzed what the authors said was a new set of data on "long-term nonemployment" and found few things that set the so-called Great Recession apart from other U.S. recessions since 1981.
The findings could bolster the view of U.S. Federal Reserve Chair Janet Yellen that the labor market has room to improve before the central bank needs to raise interest rates from near zero.
Opponents of that view, including some hawkish Fed policymakers, have argued the recent recession permanently displaced and disheartened so many workers that the natural level of unemployment - or the lowest level before wage growth starts to spur overall inflation - has risen higher.
But the paper's authors, Till von Wachter of the University of California Los Angeles and Jae Song of the Social Security Administration, found there was no effective difference from prior recessions in this respect.
They found a substantial fraction of the labor force lost jobs in each recession since the early 1980s, resulting in persistent drops in overall employment.
Continue Reading Below
"Since job loss in the 2008 recession appears to have had similar medium-term effects on employment, it is unlikely that hysteresis arising from job loss played a substantially larger role in this than in other recessions," wrote the authors.
In labor markets, hysteresis represents a permanent change in which a lower level of overall employment is considered normal.
The paper was one of only a handful prepared for the Kansas City Federal Reserve Bank's annual central banking conference in Jackson Hole, Wyoming, at which Yellen and European Central Bank President Mario Draghi will speak on Friday.
The U.S. unemployment rate was 6.2 percent in July, down sharply from 7.3 percent a year earlier. Fed policymakers think it could fall to between 5.2 percent and 5.5 percent without sparking inflation.
The central bank has said it plans to hold rates near zero for a "considerable time" after a stimulative bond-buying program ends in October in part because of "significant underutilization of labor resources."
The 79-page paper attempted to determine whether this underutilization was temporary. To gather the data on long-term nonemployment, accounting for those having experienced long spells of joblessness, the authors said they tapped administrative information on earnings and employment.