Order Code RL32047
CRS Report for Congress
Received through the CRS Web
The “Jobless Recovery” From the 2001
Recession: A Comparison to Earlier Recoveries
and Possible Explanations
August 19, 2003
Marc Labonte
Analyst in Macroeconomics
Government and Finance Division

Linda Levine
Specialist in Labor Economics
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

The “Jobless Recovery” From the 2001 Recession:
A Comparison to Earlier Recoveries
and Possible Explanations
Summary
The Business Cycle Dating Committee determined that the tenth recession in
the post-World War II era ended in November 2001 based upon its assessment that
most of the relevant economic variables had since shown sustained improvement.
Labor market data are the aberration. From November 2001 to July 2003, private
nonfarm sector employment has declined by 1.2 million. The labor market was also
slow to rebound after the recession of the early 1990s, and the term “jobless
recovery” was coined. Since this has occurred twice in a row and is perceived to
contrast with the historic pattern following other recessions, there is concern that the
two recoveries might indicate a trend rather than an anomaly.
The labor market is indeed rebounding more slowly than usual coming out of
the 2001 recession. For example, during just two of the previous nine recoveries, the
unemployment rate worsened for more than a year (14 and 16 months). At 20
months through July 2003, the rise in the unemployment rate has persisted for
unusually long. The weakness of employment is even more unusual. Employment
has declined by 1% since the recession ended, and is still declining 20 months into
the recovery. The second largest decline in the post-war period was a 0.6% decline
that lasted 11 months into the recovery from the 1990-1991 recession. Typically,
employment rebounds within 3 months after a recession has ended.
The most compelling explanation for the jobless recovery is the weakness of
aggregate spending during the recovery. Growth at this stage of the recovery
typically exceeds 5%; in this recovery it has averaged 2.6%, below the sustainable
growth rate. The nation has undergone a number of shocks since 2001 that could
have depressed spending, including oil shocks, the stock market crash, the corporate
scandals, September 11, and the Iraqi War. Some claim that strong productivity
growth is reducing employment; but productivity growth would not depress demand
as long as the recipients of the income generated by productivity growth, a firm’s
workers or investors, quickly spend it on consumption or capital investment.
It is also possible that the rise in the unemployment rate is caused by a rise in
the nation’s long-run “natural rate” of unemployment, determined by the nation’s
labor market characteristics and policies. The natural rate of unemployment is
unemployment that is unrelated to temporary changes in the business cycle. It is
unusual for the natural rate to significantly change in a couple of years. If the natural
rate is playing a role today, it is more likely because unemployment was further
below the natural rate than previously suspected in the late 1990s, and is now
returning to the natural rate.
Looking to the future, there are two possibilities. Either the recovery will
strengthen and employment will rebound, or the current weakness in the labor market
will lead to a “double dip” recession. Forecasters are predicting that the former
scenario will prevail, but slowly. This report will be updated as events warrant.

Contents
The Current Situation in the Labor Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Discouraged Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Underemployment and Hours Worked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Comparison of the Current Recovery to Past Recoveries . . . . . . . . . . . . . . . . . . . 6
Explanations for the Jobless Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Inadequate Aggregate Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
What Role Does Productivity Play? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
A Change in the Natural Rate of Unemployment . . . . . . . . . . . . . . . . . . . . 14
Looking to the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
List of Tables
Table 1. Selected Labor Market Statistics during the 2001
Recession and Ongoing Recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. The Unemployment Rate Following Recessions . . . . . . . . . . . . . . . . . . 7
Table 3. Long-Term Unemployment during Recoveries . . . . . . . . . . . . . . . . . . . 8
Table 4. Decline in Employment in the Non-Farm Private
Sector during the Post-War Recessions and Recoveries . . . . . . . . . . . . . . . . 9
Table 5. Economic Growth in Recession and First Seven
Quarters After the Recession Ended . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

The “Jobless Recovery” From the 2001
Recession: A Comparison to Earlier
Recoveries and Possible Explanations
The Business Cycle Dating Committee of the National Bureau of Economic
Research (NBER) determined that the tenth recession in the post-World War II era
ended in November 2001, a scant 8 months from its inception in March. The more
than 9 million people who remain unemployed and the more than 4 million people
who want full-time jobs but remain in part-time positions more than one-and-a-half
years since the recession’s end are unlikely to agree with its assessment.
Nonetheless, the committee concluded that – aside from data on labor market
conditions – the economic variables it takes into account to determine the turning
points in the business cycle (e.g., real personal income) have shown sufficient,
sustained improvement to declare November 2001 the beginning of a recovery
period.1
After the not-quite-as-brief and not-quite-as-mild recession of the early 1990s,
the labor market was similarly slow to rebound. The 1990-1991 recession became
widely known as having been followed by a jobless recovery, the same appellation
being applied to the current situation.2 The fact that this has occurred twice in a row
and seemingly contrasts with the historic pattern following other recessions has
prompted concern that these two recoveries might be a trend rather than an anomaly.
It has also prompted concern that the jobless recovery could presage a coming
double-dip recession – another period of economic contraction in the near future.
This report begins by examining the current labor market situation compared to
the 2001 peak and trough in the business cycle. It then compares the behavior of
selected labor market indicators during the recovery with their behavior during earlier
post-World War II recoveries and explores explanations that have been offered for
any differences. The report concludes by discussing the near-term prospects for the
economy.
1 Jon E. Hilsenrath, “Despite Job Losses, the Recession Is Finally Declared Officially
Over,“ The Wall Street Journal, July 18, 2003. Note: The article reports that the anomalous
behavior of employment was the major point of contention within the committee on
choosing a date.
2 Although the 1991 recovery is frequently referred to as the first jobless recovery, there was
one earlier recession that followed a similar pattern: after the 1969-1970 recession,
unemployment rose for 14 months.

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The Current Situation in the Labor Market
One way to assess the labor market’s response to the ongoing economic rebound
is to compare the current situation with the trough (November 2001) and the
preceding peak (March 2001) in the business cycle. In this manner, we can
determine whether the labor market has advanced from the recession’s bottom and
to what extent it has recaptured recession-induced losses.
Unemployment
As measured by all the unemployment and employment variables shown in
Table 1, workers on average have not yet begun to experience any improvement.
There are about 1 million more persons currently unemployed than at the bottom of
the business cycle (9.1 million and 8.1 million, respectively). The unemployment
rate is higher (6.2% in July 2003) than it was at the end of the recession (5.6%) and
is 2 percentage points above its level at the pre-recession peak (4.2%). At 20 months
into the current recovery, the unemployment rate is above the level it reached at a
comparable point during five of the eight preceding recoveries.3 (The recovery from
the 1980 recession is excluded from the total number of postwar recessions in this
instance because another recession began a year after its end.)
The jobless rate fluctuated in a narrow range (5.6%-6.0%) for more than a year
after November 2001. Not until some 900,000 people searching for work joined the
labor force between the first and second quarters of 2003 did the unemployment rate
rise above 6.0%. The growth of the labor force (i.e., the number of people employed
and the unemployed) had been so small up until then that it exerted limited upward
pressure on the unemployment rate despite substantial job losses.4 In fact, the rise
in the unemployment rate would have been larger if it were not for the decline in the
proportion of the population that is in the labor force, a decline that actually began
before the recession. Other recessions, in contrast, saw little or no decline in the
labor force participation rate.5
Another indicator of conditions in the labor market is how quickly people are
able to find jobs. At present, according to the data in Table 1, the average time a
worker spends unemployed is 19.3 weeks. In contrast, jobseekers were able to
become employed 4.8 weeks faster, on average, at the trough of the business cycle.
The average duration of unemployment thus has lengthened more during the recovery
3 The unemployment rate 20 months into the recovery from the 1990-1991 recession was
7.4%; from the 1981-1982 recession, 7.5%; the 1973-1975 recession, 7.8%; the 1969-1970
recession, 5.6%; the 1960-1961 recession, 5.4%; the 1957-1958 recession, 5.3%; the 1953-
1954 recession, 4.0%; and from the 1948-1949 recession, 3.2%.
4 The unemployment rate is defined as the number of people in the civilian noninstitutional
population age 16 or older who do not have jobs and who are actively seeking employment,
divided by the number of people age 16 or older in the civilian labor force.
5 Mark Schweitzer, “Another Jobless Recovery?,” Economic Commentary, Federal Reserve
Bank of Cleveland, March 2003.

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(4.8 weeks) than it did during the recession (1.7 weeks).6 Similarly, the share of
unemployed workers who have not held a job in at least 27 weeks (21.7% in July
2003) continues to exceed levels recorded in March 2001 (11.2%) and November
2001 (14.3%).
Discouraged Workers
It often has been noted that the unemployment rate does not fully reflect the
state of the labor market because it measures only the extent of joblessness among
those in the labor force. In light of the marked decrease in the fraction of the
population that either has a job or has actively sought a job in the 4 weeks before the
monthly administration of the Current Population Survey (CPS), this is a very salient
point at the present time: between November 2001 and July 2003, the proportion of
the civilian noninstitutional population age 16 or older that was in the labor force
(i.e., the labor force participation rate) fell by 0.6 percentage point to 66.2%.7 As
previously mentioned, it was not until people surged into the labor force in second
quarter 2003 that the unemployment rate rose above 6.0%.
People who are able and willing to work may not recently have sought a job for
a variety of reasons, in which case they would not be officially classified as
unemployed. Some may not have searched for reasons unrelated to economic
conditions (e.g., child care or transportation problems). For others – who perhaps
have themselves experienced a lengthy spell of unemployment or who have
repeatedly heard of major corporations announcing layoffs involving thousands of
workers8 – the reason could be discouragement over their employment prospects
(e.g., because they think no work is available or because they lack education or
training).
Almost 500,000 people currently are not seeking jobs because they believe
looking is futile.9 This marks the second-highest level of worker discouragement for
the month of July since the CPS underwent substantial revisions in 1994, the first
year for which comparable data are available. There were significantly more
discouraged workers in July 2003 (470,000) than in July 2002 (405,000), and in July
2002 than mid-way through the 2001 recession (310,000).10
6 For a discussion of the relationship between the average duration of unemployment and
the unemployment rate following recessions see Daniel Sullivan, “Unemployment Duration
and Labor Market Tightness,” Chicago Fed Letter, Federal Reserve Bank of Chicago, n.
103, March 1996.
7 Data available at U.S. Bureau of Labor Statistics’ website [http://stats.bls.gov.]
8 For information of mass layoff activity see CRS Report RL30799, Corporate Downsizing
and Other Mass Layoffs
, by Linda Levine.
9 The BLS data (July 2003) refer to individuals who looked for a job during the prior 12
months and were available to take a job during the reference week of the CPS, i.e., those
who show some attachment to the labor force.
10 Unlike the other variables included in this report, monthly data on discouraged workers
are not adjusted for seasonal factors. Therefore, comparisons across different months are
(continued...)

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Table 1. Selected Labor Market Statistics during the 2001
Recession and Ongoing Recovery
Variable
Current month
Business cycle peak and trough
July 2003
March 2001
November 2001
Number of unemployed
9,062,000
6,108,000
8,078,000
persons
Unemployment rate
6.2
4.2
5.6
Average weeks of
19.3
12.8
14.5
unemployment
Persons unemployed at
least 27 weeks as a share of
21.7
11.2
14.3
total unemployment
Employed persons as a
62.1
64.3
63.0
share of the population
Persons employed part-
time (1-34 hours a week)
4,649,000
3,302,000
4,313,000
who would prefer full-time
jobs
Employees on nonfarm
payrolls in the private
108,397,000
111,577,000
109,563,000
sectora
Average weekly hours of
workers on private nonfarm
33.6
34.1
33.8
payrollsb
Average weekly overtime
hours of production
4.0
4.1
3.8
workers in manufacturing
industries
Source: U.S. Bureau of Labor Statistics (BLS). All but the last three variables in the table are derived
from the Current Population Survey, a survey of households. The last three variables come from BLS’
establishment survey, which queries employers rather than the population.
a This reflects the number of jobs at establishments in the private nonfarm sector rather than the
number of people employed throughout the economy (e.g., a person may have a job at more than one
firm and some individuals are self-employed).
b Hours relate to production and nonsupervisory workers, who represent the majority of all jobholders.
10 (...continued)
not appropriate.

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Employment
Switching to the employment side of the equation does not reveal a more
sanguine picture. (See Table 1.) Fewer members of the population have jobs today
(62.1% in July 2003) compared to the fraction either at the outset of the recession
(64.3%) or at its end (63.0%). (As mentioned above, the unemployment rate is
affected by changes in the size of the labor force, which does not affect the
employment-to-population ratio.)
Employment, as measured by the number of employees on nonfarm payrolls in
the private (non-government) sector, has continued to contract during the recovery.
There are almost 1.2 million fewer jobs today than there were at the recession’s end.
The economy would need to add almost 3.2 million jobs to July 2003's total to equal
the number that existed at the outset of the recession.
Manufacturers have been laying off employees since July 2000, well before the
recession began; and the recovery has not reversed the job cutbacks. Manufacturers
have shed 1.2 million jobs thus far during the recovery, according to BLS data. The
continuing difficulties of one segment of the “information technology (IT) industry”
can be seen at firms that manufacture computer and electronic products, where
238,000 jobs have disappeared since the recession’s end. On the software side of the
IT industry, another 102,000 jobs have been lost at firms in the service-producing
sector that provide computer system design and related services. The continuing
impact of the burst dot-com or internet bubble can be seen in the sector’s information
services component, which employs many workers with IT skills: between November
2001 and July 2003, telecommunications providers have let go 143,000 workers;
internet service providers, search portals, and data processing firms have terminated
36,000 employees; and internet publishers and broadcasters have separated almost
5,000 workers from their payrolls – for a total of 184,000 fewer jobs. These losses
and those in other segments of the service-producing sector (e.g., retail trade and
transportation) have offset job growth elsewhere in the sector (e.g., health services
and temporary help services). As a result, the private service-producing sector as a
whole has thus far eked out a 63,000 job gain during the recovery.11
Underemployment and Hours Worked
As with the unemployment rate, it is thought that changes in employment do not
fully reflect the conditions faced by workers. Some individuals are underemployed,
that is, they accept part-time jobs (i.e., 1-34 hours a week) despite their preference
for full-time positions. In July 2003, as shown in Table 1, some 4.6 million part-
timers wanted full-time jobs, which is about 1.3 million more underemployed
persons than in March 2001 and 336,000 more than in November 2001.12
11 For a comparison of employment trends by industry during pre-2001 recessions and
recoveries see William E. Cullison, “The Case of the Reluctant Recovery,” Economic
Review
, Federal Reserve Bank of Richmond, July-Aug. 1992.
12 For information on the long-run increase in involuntary part-time employment see CRS
Report 98-695, Part-Time Job Growth and the Labor Effects of Policy Responses: An
(continued...)

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Employers have not only continued to cut employees from their payrolls since
the recession’s end, but they also have not generally lengthened employees’
workweeks.13 After expanding by 12 minutes from 33.8 hours in November 2001 to
a peak of 34.0 hours in June 2002, the average workweek held at about 33.8 hours
through March 2003. Since then it has contracted, and in July 2003, dipped to 33.6
hours on average, or 12 minutes shorter than at the outset of the recovery.
For much of 2002, manufacturers were having their employees work 24-36
minutes longer a week, on average, rather than recalling laid off workers.14 But, in
July 2003, the average workweek in manufacturing fell back to 40.1 hour weeks – the
same as it had been in November 2001. The overtime hours of factory workers
(which are included in the workweek total) have followed a similar path, that is,
elevated during 2002 but then falling during the last several months of 2003.15
Nonetheless, factory workers are still putting in slightly more overtime than they had
at the start of the recovery (a total of 4.0 hours per week as compared to 3.8 hours,
respectively).
Comparison of the Current Recovery to Past
Recoveries
As can be seen in Table 2, there has always been some lag time before the
unemployment rate showed sustained improvement coming out of a recession. In all
but two of the previous nine recoveries, the unemployment rate began to decline
within 6 months of the recession’s end. The exceptions are the recoveries that
followed the 1969-1970 and 1990-1991 recessions, during which the unemployment
rate continued to climb for 14 months and 16 months, respectively. At 20 months
through July 2003, then, the current lag in the unemployment rate showing steady
progress is unusually long. The three recessions that were followed by a jobless
recovery, based on this criterion, are three of the four mildest recessions in post-war
history. The fourth was the short recession of 1980. (The relationship between the
strength of recessions and recoveries is discussed in Explanations for the Jobless
Recovery
, which appears later in the report.)
12 (...continued)
Overview, by Linda Levine.
13 For information on the long-run decrease in the length of the workweek see Katie
Kirkland, “On the Decline in Average Weekly Hours Worked,” Monthly Labor Review, July
2000.
14 For information on manufacturers’ increased use of overtime during the past decade
compared to earlier periods see CRS Report 97-884, Longer Overtime Hours: the Effect of
the Rise in Benefit Costs
, by Linda Levine.
15 Overtime has been identified as a leading indicator for changes in employment. If this
relationship holds, it would suggest some decline in manufacturing employment in the
months ahead. See Stephen Stanley, “Manufacturing Employment and Overtime,” Cross
Sections
, Federal Reserve Bank of Richmond, v. 9, no. 2, Summer 1992.

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Table 2. The Unemployment Rate Following Recessions
Trough of business cycle
Unemployment rate
Date
Unemployment
Unemployment
Unemploy-
Number of
rate
rate began
ment rate
months
sustained
from
improvement
trough
Oct. 1949a
7.9
Jan. 1950
6.5
3
May 1954
5.9
Oct. 1954
5.7
5
Apr. 1958
7.4
Aug. 1958
7.4
4
Feb. 1961
6.9
Aug. 1961
6.6
6
Nov. 1970
5.9
Jan. 1972
5.8
14
Mar. 1975
8.6
June 1975
8.8
3
July 1980
7.8
Aug. 1980
7.7
1
Nov. 1982
10.8
Jan. 1983
10.4
2
Mar. 1991
6.8
July 1992
7.7
16
Nov. 2001
5.6



Source: U.S. Bureau of Labor Statistics data from the CPS; business cycle dates determined by
NBER.
a Two strikes occurred in October 1949, which inflated the unemployment rate in that month. (Before
1967, strikers were counted as unemployed.) In September 1949, before the strikes began, the
unemployment rate had been 6.6%.
Policymakers are interested not only in changes in the unemployment rate, but
also in the proportion of persons who experience long periods without work. The
federal-state unemployment compensation system provides income for varying
lengths of time to those displaced workers who meet differing state eligibility criteria.
In response to some past recessions and the 2001 recession, Congress provided
additional funds to workers who had been jobless for so long that they exhausted
their regular unemployment benefits.16 It appears that during the latest recovery the
fraction of workers unemployed for at least 27 weeks may have peaked in February
2003, 15 months since the trough of the recession. (See Table 3.) Only the
recoveries from the 1969-1970 and 1990-1991 recession were more delayed: it took
17 months and 19 months, respectively, from the start of the two recoveries for the
share of workers unemployed longer than 6 months to peak. Nonetheless, it took
16 CRS Report RL31277, Temporary Programs to Extend Unemployment Compensation, by
Jennifer E. Lake. Note: Congress also has passed legislation to mitigate the labor market
impact of some recessions by directly creating jobs. For more information see CRS Report
RL31138, Countercyclical Job Creation Programs of the Post-World War II Era, by Linda
Levine.

CRS-8
longer for the share to peak during the current recovery than it did during the other
seven recoveries, even though many of the recessions they followed were deeper.
Table 3. Long-Term Unemployment during Recoveries
Trough of business cycle
Recovery period
Date
Share of
Date share of
Peak share of
Number of
unemployed
long-term
long-term
months
without jobs for
unemployment
unemploy-
from trough
at least 27 weeks
peaked
ment
Oct. 1949
7.8
April 1950
13.4
6
May 1954
8.5
Feb. 1955
14.7
9
Apr. 1958
10.5
Sept. 1958
20.7
5
Feb. 1961
13.7
July 1961
19.9
5
Nov. 1970
6.7
April 1972
13.6
17
Mar. 1975
9.7
Feb. 1976
21.0
11
July 1980
10.7
Jan. 1981
15.7
6
Nov. 1982
19.5
June 1983
26.0
7
Mar. 1991
11.1
Oct. 1992
23.1
19
Nov. 2001
14.3
Feb. 2003
22.1
15
Source: U.S. Bureau of Labor Statistics data from the CPS; business cycle dates determined by
NBER.
Rather than utilizing unemployment data to determine whether a recovery is
jobless, one could analyze how employment has fared in the post-war recessions and
recoveries. Employment (measured in the establishment survey as the number of
jobs) and unemployment (measured in the CPS, which counts individuals) need not
move together since the latter is affected by changes in the size of the labor force.
Looking at employment data, the difference between the last two recoveries and the
other post-war recoveries is even more pronounced. Historically, employment has
been more of a coincident indicator of economic activity, and less of a lagging
indicator, than the unemployment rate. Employment typically began to increase in
the month the recovery began, and at most 3 months after the recession had ended.
The last two recoveries have been quite a different story. As shown in Table 4,
employment did not reach a trough until 11 months after the 1990-1991 recession had
ended. Currently, employment has still not reached its trough 20 months after the
end of the 2001 recession.17
17 For a similar historical comparison see Stacy Schreft and Aarti Singh, “A Closer Look at
Jobless Recoveries,” Economic Review, Federal Reserve Bank of Kansas City, Second
Quarter, 2003.

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Table 4. Decline in Employment in the Non-Farm Private Sector
during the Post-War Recessions and Recoveries
Recession dates
Percent
Percent
Number of
Date
decline in
decline in
months that
employment
employment
employment
employment
surpassed
during
after
declined
previous
recession
recession
after
peak
ended
recession
ended

Nov. 1948-Oct. 1949
6.2
0.0
0
Aug. 1950
July 1953-May 1954
3.8
0.5
3
July 1955
Aug. 1957-Apr. 1958
4.9
0.4
2
July 1959
Apr. 1960-Feb. 1961
2.1
0.0
0
Feb. 1962
Dec. 1969-Nov. 1970
1.8
0.0
0
Dec. 1971
Nov. 1973-Mar. 1975
2.7
0.4
1
June 1976
Jan. 1980-July 1980
1.4
0.0
0
Feb. 1981
July 1981-Nov. 1982
3.4
**
1
Oct. 1983
July 1990-Mar. 1991
1.3
0.6
11
May 1993
Mar. 2001-Nov. 2001
1.9
1.1a
20a

Source: U.S. Bureau of Labor Statistics data from the establishment survey; recessions dated by
NBER.
a Percent decline and number of months through July 2003.
**less than 0.1%.
Another measure of employment recovery is the date in which post-recession
employment surpasses its previous peak. By this measure, the last two recoveries
stand out as unusually sluggish. Not until May 1993 did employment surpass its
previous peak in March 1990, 26 months after the 1990-1991 recession had ended.
(See Table 4.) Currently, 20 months after the 2001 recession ended, employment is
still more than 3 million below its February 2001 peak. After every other post-war
recession, employment surpassed its previous peak 10-15 months after the recession
had ended.
Another important difference in the past two recoveries is that a significant
portion of the decline in employment occurred after the recession had ended. As
measured by the change in employment during the recession itself, the 2001 recession
ranks as the third mildest recessions in the post-war period, with less than a 2%
decline. Yet, the post-recession decline in employment through July 2003 is by far
the largest of the post-war period (1.0%).

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Explanations for the Jobless Recovery
Inadequate Aggregate Demand
In the short run, the unemployment rate is very sensitive to changes in economic
growth. Although the recession ended in November 2001, the recovery has been
unusually weak. Growth has been below its sustainable rate for the last 3 quarters,
during which time it averaged 1.7%.18 Growth has been below its sustainable rate for
5 of the 7 quarters of this recovery. At the least, one would not expect
unemployment to fall when growth is weak, and it is not surprising to see it rise.
The current recovery has not followed the pattern of most post-war recoveries,
which featured post-recession booms. Part of the reason the recovery has been
unusually mild is that the recession was so mild. In the first 3 quarters of 2001,
output contracted by a cumulative 0.6% of gross domestic product (GDP), making
it the mildest recession of the post-war period. After a deep recession, output can be
rapidly increased because there are many existing unemployed labor and capital
resources that can be brought back into production when aggregate spending
recovers. Because the contraction in output was negligible in 2001, following this
recession, there are far fewer idle resources to be put back into use.19 A look at the
historical record confirms this hypothesis (see Table 5). There were only two other
post-war recoveries besides the current one in which average growth was 3.1% or
below at a similar stage in the recovery (first 7 quarters): the recoveries beginning
in 1970 and 1991. Altogether, the mild recoveries followed three of the five mild
post-war recessions, in which output declined by less than 2%.20 In every other
recovery, the average growth rate exceeded 5% at a comparable point.
18 The sustainable rate of growth is the rate at which additions to the labor force, capital
stock, and technical efficiency can increase output in the long run when the economy is at
full employment. Most economists today put the sustainable growth rate for the United
States at 3%-3.5%.
19 Capacity utilization data tell a different story. The fall in capacity utilization in this
recession was much larger than the fall in output, and this suggests there are potentially
more idle resources to be brought back into use in the recovery. Annually, capacity
utilization fell from 82.7% in 2000 to 74.8% in 2003 (through July). This is larger than the
decline during the 1990-1991 recession and similar to the decline during the 1981-1982
recession. The capacity utilization data cover only the industrial sector, however, which was
harder hit than the service sector in the 2001 recession. If similar data were available for
the service sector, it would presumably show a much smaller decline.
20 The unusual behavior of growth in the 1949 recession and subsequent recovery is
attributable to the demobilization of the wartime economy. The 1980 recession is omitted
from this discussion because the subsequent recovery lasted less than 7 quarters.

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Table 5. Economic Growth in Recession and First Seven
Quarters After the Recession Ended
Recession
Recovery
Period
Percent decline
Period
GDP growth
in GDP
rate
(cumulative)
(annualized)
1949:1-1949:4
-1.6
1950:1–1951:3 10.8
1953:3-1954:1
-2.7
1954:2–1955:4 5.7
1957:4-1958:1
-3.7
1958:2–1959:4
6.0
1960:2-1960:4
-1.6
1961:1–1962:3
5.9
1969:4-1970:1
-0.6
1970:2–1971:4
2.5
1973:3-1975:1
-3.0
1975:2–1976:4
5.0
1981:4-1982:3
-2.9
1982:4–1984:2
6.8
1990:3-1991:1
-1.5
1991:2–1992:4
3.1
2001:1-2001:3
-0.6
2001:4–2003:2
2.6
Source: U.S. Bureau of Economic Analysis.
Note: For the purposes of this table, the recession is dated as beginning in the first quarter of negative
growth and the recovery is dated as the first quarter of positive economic growth. Data for the 1980-
1981 recovery are omitted because the 1981-1982 recession began less than 7 quarters after the 1980
recession ended.
The correlation between mild recessions and mild recoveries also holds when
measured by employment. There were only four post-war recessions in which
employment decreased by less than 2%: 1969-1970, 1980, 1990-1991, and 2001 (see
Table 4) Unsurprisingly, all three of the recoveries in which the unemployment rate
continued to rise for 6 months or more are included in this group (see Table 2), with
only the 1980 recovery leading to a quick decline in unemployment (followed shortly
thereafter by another recession).21
What is holding the current recovery back? The economy has faced a number
of unusual shocks since 2001. Before the recession began, oil prices more than
doubled on an annual basis. Since then they have fluctuated between $20 and $30
a barrel – higher than the pre-spike price – increasing again in the months heading
up to the war in Iraq. Oil spikes temporarily reduce aggregate production by
21 These results are consistent with an economic rule of thumb known as Okun’s Law, which
roughly relates changes in economic growth to changes in the unemployment rate. In one
version of Okun’s Law, the unemployment rate will rise if economic growth is not rapid
enough to accommodate growth in productivity and the labor force. If the potential growth
rate of productivity is 2.5% and the labor force grows at 1% a year, then unemployment will
rise when economic growth is below 3.5%. As can be seen in Table 5, Okun’s law correctly
predicts all three of the post-war jobless recoveries (1970, 1991, 2001). See CRS Report
RS21139, Unemployment and Economic Growth, by Brian Cashell.

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increasing the price of an important input in the production process and reduce
aggregate spending if the shift in income to foreign oil producers is not quickly spent
on American goods and services.22 The recession also coincided with a large decline
in equity prices (e.g., the Standard and Poor’s 500 Index fell 45% from peak to
trough), which began to recover only in early 2003. This reduced the willingness or
ability of firms to borrow to finance new investment spending and reduced personal
consumption through a negative wealth effect. Toward the end of the recession,
September 11 occurred. This may have weakened consumer and investor demand
by creating uncertainty and reducing confidence. It also caused large sectoral shifts
on the production side of the economy, with long lasting effects on certain industries
such as the airlines, tourism, and insurance, and certain regions, such as New York
City.23 The recovery was also buffeted by the corporate governance and accounting
scandals set off by the Enron bankruptcy, which undoubtedly reduced investment
spending and equity prices further. Finally, the lead-up to military action in Iraq was
thought to harm the economy both through the oil price channel outlined above and
by further reducing consumer and investor confidence.
It is difficult to quantify many of these effects since they were each unique and
of a qualitative nature. Some of them may have been relatively insignificant in
relation to overall economic activity. Nevertheless, added up, it is impressive how
many negative events harmed the economy in 2001-2002, compared to how few
positive events there were to offset them. To the extent that these events heightened
uncertainty, they may have made employers less willing to quickly expand their
workforces than they otherwise would have been.24 Still, it is somewhat surprising
that the economy has not reacted more quickly to the large stimulus provided by
monetary and fiscal policy over the past 2 years. During that time, the federal funds
rate was reduced from 6.5% to 1% and the budget moved from a surplus of 1.3% of
GDP in 2001 to a projected deficit of 4.2% of GDP in 2003.
During recessions, firms engage in what economists call “labor hoarding.”
Rather than laying off enough workers so that the remaining workforce is fully
employed in a downturn, firms prefer to keep more workers than output requires
because it is less costly than hiring and training new workers when the economy
recovers.25 It is possible that more labor hoarding occurs in shallow recessions, and
firms are forced to make larger layoffs in deep and prolonged recessions. If so, that
implies that firms will initially need to make fewer hires following a mild recession
since the initial increase in output can be met by the previously underutilized
22 See CRS Report RL31608, The Effects of Oil Shocks on the Economy: A Review of the
Empirical Evidence
, by Marc Labonte.
23 See CRS Report RL31617, The Economic Effects of 9/11: A Retrospective Assessment,
coordinated by Gail Makinen, and CRS Report RL31250, The Worker Adjustment and
Retraining Notification Act (WARN)
, by Linda Levine for data on mass layoffs resulting
from the terrorist attacks.
24 Bharat Trehan, “Why Has Employment Grown So Slowly?,” Weekly Letter, Federal
Reserve Bank of San Francisco, n. 93-14, April 9, 1993.
25 The seminal article on labor hoarding is Walter Oi, “Labor as a Quasi-Fixed Factor,”
Journal of Political Economy, vol. 70, n. 6, Dec. 1962, p. 538.

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“hoarded” workers. This offers one reason why shallow recessions followed by
shallow recoveries would initially lead to less hiring. It is difficult to test this theory
empirically, however, since there is no meaningful way to measure labor hoarding.26
What Role Does Productivity Play?
It has been argued that strong productivity growth can explain why firms have
not been hiring in the current recovery.27 According to this argument, strong
productivity growth allows firms to meet increases in final demand from their
existing workforce, so they have no need to hire new workers. Strong productivity
growth has been described as a mixed blessing because, so the argument goes, firms
would have to make more hires if productivity growth were weaker. The
productivity-induced weakness in labor markets is then blamed for the sluggish
recovery on the grounds that it has caused workers to be too uncertain about the
employment outlook to spend robustly.28
While it is true that productivity growth has been strong enough to increase
output without any increase in employment, this argument confuses cause and effect.
Increased productivity does not necessarily cause production (supply) to outpace
spending (demand). Higher productivity creates higher income for the firm that
flows either to its workers or its investors (a firm’s owners, creditors, and
shareholders). As long as the recipients then spend their higher income on
consumption or capital investment, increases in supply will be quickly matched by
increases in demand.29
The real issue then is the forces holding back aggregate demand, the subject of
the previous section, despite the increases in productivity that are boosting output.
And the strong productivity gains make demand seem stronger than it is in a casual
comparison to the past. Economic growth is caused jointly by increases in the labor
force, which grows at a fairly steady 1% a year, and increases in productivity (due to
26 One measure that seems to confirm this theory is the ratio of job losers to total
unemployed. If firms are hoarding labor, then there should be a smaller increase in the ratio
of job losers to total unemployed. There was a much larger increase in this ratio in the deep
recessions of 1973-1975 and 1981-1982 than in the mild recessions of 1969-1970, 1990-
1991, and 2001.
27 This argument is made, for example, in “A Jobless Recovery?,” Time Magazine, July 15,
2002, p.Y9. For more information on the performance of productivity in the recession, see
CRS Report RS21527, The Performance of Productivity During the Recent Slowdown, by
Marc Labonte.
28 It is interesting to note that in the late 1990s, many economists were arguing that faster
productivity growth was temporarily reducing the unemployment rate. They argued that
workers, who had not anticipated the increase in productivity growth, were raising their
wage demands too slowly. This made labor relatively inexpensive and led firms to hire
more workers. For example, see Laurence Ball and Gregory Mankiw, “The NAIRU in
Theory and Practice,” Journal of Economic Perspectives, vol. 16, n. 4, Fall 2002.
29 This assumes that the Federal Reserve Board will allow monetary policy to accommodate
the increase in supply. With the federal funds rate at its lowest point in decades, it is
difficult to argue that such an accommodation has not occurred at the present.

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capital investment or efficiency gains). From the mid-1970s to the mid-1990s, when
productivity was growing at about 1.5% a year, the economy could grow at 2.5%
without an increase in the unemployment rate. Now that the productivity growth rate
seems to have increased, a 2.5% economic growth rate is no longer sufficient to keep
the unemployment rate stable, and no longer indicates that demand is growing
quickly enough to keep production at full employment.
A Change in the Natural Rate of Unemployment
The other possible explanation for why the unemployment rate has risen for so
long during this recovery is that the economy’s natural rate of unemployment is
rising, independent of the effects of changes in aggregate spending.
In the long run, the economy always adjusts so that aggregate spending
(demand) matches aggregate production (supply). The unemployment rate that
would prevail in this situation is called the natural rate of unemployment. When
unemployment is at the natural rate, none of the unemployment is caused by weak
economic growth. Rather, workers are unemployed because they are either in the
process of moving from one job to another or their skills are incompatible with the
jobs available in the local area. In other words, the natural rate of unemployment is
caused by the supply side of the labor market. The natural rate can change over time
as the characteristics of the labor market change. For example, since older workers
have a lower unemployment rate than younger workers, as the population ages, the
natural rate of unemployment would automatically decline. The natural rate can also
change if labor market policies alter the characteristics of the labor market. For
example, most economists believe that the natural rate in the United States is about
half the rate in many Western European countries because the U.S. labor market is
more flexible. In the United States, it is easier for a firm to alter the size of its
workforce, there is a less generous social safety net, and there is more regional labor
mobility.30
Because the natural rate is a long-run concept, it is difficult to believe the natural
rate could have changed significantly over the past two-and-a-half years. There has
not been any major change in labor market policy during that time, and demographic
changes are incremental. If the natural rate has changed, it would be part of a longer
trend that will not be identifiable in the near term.
There is another reason why the unemployment rate might have continued to
rise for so long related to the natural rate concept. Even if the natural rate had not
changed over the past two-and-a-half years, it is possible that when unemployment
reached 3.9% in December 2000, it was further below the natural rate than suspected.
Just as the unemployment rate can temporarily rise above its natural rate when
growth is too slow, unemployment can temporarily fall below the natural rate when
growth is unsustainably fast. In these circumstances, one would expect to see a rising
inflation rate as wages are pushed above productivity because too many jobs are
chasing too few workers. Few economists believed the natural rate had reached as
30 See CRS Report RL30765, Causes of Unemployment: A Cross Country Comparison, by
Marc Labonte.

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low as 3.9% in 2000, but many assumed that 3.9% was not too far from the natural
rate since there was no significant upward pressure on inflation at that time. In
hindsight, if the natural rate has been higher than suspected in recent years, say 6.0%
versus 5.0%, then the prolonged increase in the unemployment rate could partly be
attributable to the long-term adjustment back toward the natural rate from an
unsustainably low level. In this case, one would expect the unemployment rate to fall
once the recovery becomes more robust, but it will fall less than expected. Those
who argue that the natural rate was underestimated in the late 1990s point to the fact
that the natural rate averaged 6%-6.5% in the 1970s and 1980s. To put that figure
in perspective, consider that today’s unemployment rate would have been considered
to be full employment, only attainable near the peak of the business cycle, 20 years
ago.
Since the natural rate is a long-run concept, it is too soon to determine which
portion, if any, of the recent increase in the unemployment rate is supply-side driven,
and which portion is demand-driven. But the inflation rate is one piece of evidence
to determine whether inadequate demand or a change in the natural rate is currently
driving the rise in unemployment. If the economy is suffering from insufficient
demand, the inflation rate should be falling; if the unemployment rate is being driven
by changes in the labor market, inflation should be unaffected. The core inflation
rate, which strips out volatile food and energy prices, has fallen from 2.6% in 2001
to 2.4% in 2002 to 1.6% in 2003. This indicates that insufficient demand is likely at
least part of the story behind the rise in the unemployment rate.
Looking to the Future
Economist Herbert Stein once said “If something cannot go on forever, it will
stop,” and this is undoubtedly true of the jobless recovery. Rising employment is an
essential characteristic of every economic expansion, and it is certain to be a
characteristic of the current expansion once the economy picks up steam, even if
employment has continued to fall for an unusually long time thus far. The relevant
question is how long it will take the economy to return to full employment. If the
natural rate of unemployment is 4.5%-5.5%, as economists were suggesting in the
late 1990s, then the economy would need to grow fairly rapidly, at a rate above its
long-term sustainable rate, to return to full employment quickly.
Economic forecasters are not predicting rapid enough growth in the next year-
and-a-half to bring the economy back to full employment in that time period. For
example, the Blue Chip forecast of 50 private forecasters is predicting growth to
increase to 3.75% in the second half of the year and 2004. This would be an
improvement over the economy’s performance to date, and indicates that forecasters
believe the recovery has taken root. But forecasted growth would not be strong
enough to bring the unemployment rate down to the natural rate by the end of the
forecast period: the forecasters are predicting an unemployment rate of 6.2% in the

CRS-16
second half of the year and 5.9% in 2004.31 These results are uncertain, as the margin
of error on forecasts is great.
There is an alternative course the economy could follow. While much of the
recent economic data give one reason to feel relatively upbeat about future prospects,
the failure of the labor market to recover does raise the question of whether the
United States is heading for a “double dip” recession. In the early 1980s, the
economy shrank for 6 months in 1980, grew for 1 year from 1980 to 1981, and then
shrank for 16 months from 1981 to 1982. It is possible that the labor market is
signaling that the economy will follow a similar pattern today.
Perhaps the best reason to think that the double dip scenario is too pessimistic
is that many of the factors that were recently holding the recovery back have passed.
The uncertainty that war, and to an extent terrorism, placed on the economy has
lifted. The stock market seems to be staging a recovery, and discoveries of fresh
corporate scandals seem to be waning. Oil prices are more likely to fall than rise in
the future, and even if they stay constant, the economy should soon have fully
adjusted to the earlier shock. With these shocks dissipated, most economists believe
the highly stimulative stance of fiscal and monetary policy should soon take hold.
Will future recoveries follow the pattern of the past two jobless recoveries?32
No generalization can be made since every recession and recovery is unique. One
can say, however, that most macroeconomists believe that policymakers have
improved their ability to make recessions milder in recent decades through the more
effective use of monetary policy. If the past two recoveries are any guide, this
suggests that an unintended and unwanted side effect of milder recessions could be
a more sluggish recovery of the labor market.
31 For updates of and additional information on forecasts for the U.S. economy see CRS
Report RL30329, Current Economic Conditions and Selected Forecasts, by Gail Makinen
and Anne Vorce.
32 The thoughts of some economists on this point can be found in John Maggs, “A Jobless
Recovery,” National Journal, April 26, 2003.