Working Papers

2020-20 | May 2020

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Why Has the US Economy Recovered So Consistently from Every Recession in the Past 70 Years?

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It is a remarkable fact about the historical US business cycle that, after unemployment reached its peak in a recession, and a recovery began, the annual reduction in the unemployment rate was stable at around 0.55 percentage points per year. The economy seems to have had an irresistible force toward restoring full employment. There was high variation in monetary and fiscal policy, and in productivity and labor-force growth, but little variation in the rate of decline of unemployment. We explore models of the labor market's self-recovery that imply gradual working off of unemployment following a recession shock. These models explain why the recovery of market-wide unemployment is so much slower than the rate at which individual unemployed workers find new jobs. The reasons include the fact that the path that individual job-losers follow back to stable employment often includes several brief interim jobs, sometimes separated by time out of the labor force. We show that the evolution of the labor market involves more than the direct effect of persistent unemployment of job-losers from the recession shock--unemployment during the recovery is elevated for people who did not lose jobs during the recession.

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Article Citation

Hall, Robert E, and Marianna Kudlyak. 2020. "Why Has the US Economy Recovered So Consistently from Every Recession in the Past 70 Years?," Federal Reserve Bank of San Francisco Working Paper 2020-20. Available at https://doi.org/10.24148/wp2020-20