Published online by Cambridge University Press: 18 January 2016
This paper considers a correlated unobserved-components model for output, employment, and hours in order to disentangle the causes for the last three jobless recoveries. The composition of the structural shocks during recessions and the periods immediately following recessions has changed, as have the responses of employment and hours to those shocks. Recessions before 1984 were followed by recoveries driven by positive permanent shocks to output, whereas post-1984 recessions were followed by weak recoveries in demand. Employment is more sensitive to demand shocks post-1984, leading to weak recoveries in employment. In addition, hours and employment were complements before 1984, but are treated as substitutes after 1984. Much of the initial decrease in demand is now absorbed on the intensive margin.
I thank two anonymous referees, Luiggi Donayre, Yunjong Eo, Steven Fazzari, James Morley, Werner Ploberger, Raul Santaeulalia-Llopis, Tara Sinclair, and seminar participants at the University of Queensland, Monash University, the University of Auckland, Illinois State University, Bank of Canada, West Virginia University, Georgia State University, the University of Illinois Urbana–Champaign, Lehigh University, Miami University, and North Dakota State University. I would also like to thank the participants at the 2013 WEAI, the 2013 SBIES NBER NSF Seminar, the 2012 SNDE, the 2012 CEF, the 2012 MEG, and the Washington University Macroeconomics Working Group for helpful comments and discussions. I gratefully acknowledge the support of the Department of Economics and the Graduate School of Arts and Sciences at Washington University, and of the Olin Fellowship program.