American Institute for Economic Research

The Changing Nature of Recessions

RESEARCH STUDY
 AIER RESEARCH STUDY
The Changing Nature of Recessions

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Acknowledgments
I would like to thank Steven R. Cunningham, PhD for his help in developing ideas for this paper.

Author: Polina Vlasenko, PhD, Senior Research Fellow

Editors: Georgette Jasen, Robert Rosenberg, and Marcia Stamell

© Copyright 2014 American Institute for Economic Research.

Reproduction with permission is encouraged.
 AIER Research Study | The Changing Nature of Recessions

Contents

01 Introduction 1
Business Cycles—Then and Now 3

02 The Forces Behind the Change: A Shift to Structural Recessions 9

Employment Impacts Are More Severe  10
Productivity Cuts into Job Creation 11

03 The End of Simple Recessions and Rise of Structural Recessions 15

Businesses are Better Able to Plan Production 15
Government’s Role in Managing the Economy 16
Employment Shifts from Manufacturing to Services 17
Globalization Multiplies the Sources of Structural Shifts 19
New Trends are Likely to Persist 21

04 Implications: How to Prepare for the Next Recession  23

Resiliency Strategies for Individuals 24
Resiliency Strategies for Businesses 27
Be Ready for Change 30

05 References 31

06 Appendix 1: U.S. business-cycle expansions and contractions 33

07 Appendix 2: Comparing output loss and employment

loss in postwar recessions 35

End Notes  37
Introduction
 01 Introduction

Recessions are a permanent and inevitable percent in October 2009. And recovery
aspect of the economic landscape. The in employment was even slower than the
next recession is coming, and when it recovery in output. Only in May 2014,
arrives, it will bring with it challenges, six-and-a-half years after the start of the
the contours of which are impossible to recession, did the total number of U.S. jobs
predict. However, trends in recent data return to its prerecession level, according
reveal fundamental changes in the nature of to the BLS. But over the period, the labor
recessions, which suggest the next recession force grew by an additional 1.5 million
is likely to include structural shifts in the people. And so, even now we cannot
economy that will test businesses and say that the economy has returned to
individuals in new and unexpected ways. prerecession levels of labor utilization,
The Great Recession, which officially in spite of the fact that output surpassed
lasted from December 2007 to June the prerecession level three years ago.
2009, exemplifies these changes. By This “jobless recovery” is the latest in
many measures, it was the most severe a series of business cycles with especially
downturn in the United States since the weak employment growth and is a reflection
Great Depression. From peak to trough, the of the changing nature of recessions.
gross domestic product (GDP) of the U.S., Since the late 1980’s, recessions have
adjusted for inflation, declined 4.3 percent, been driven by structural changes in the
the most severe contraction in the postwar economy, with long and far-reaching
era. It also took quite a while for GDP to consequences, rather than by the simpler
recover. It wasn’t until the middle of 2011, demand shocks that were responsible
three-and-a-half years after the recession for many of the earlier downturns.
began, that U.S. GDP finally surpassed its The latest jobless recovery is part of
prerecession level. This was the slowest pace this trend. The term was first coined to
of recovery in output since World War II. describe the recovery from the relatively
Employment was similarly hard hit. At its mild 1990-1991 recession. During that dip,
lowest point, in February 2010, the U.S. the decline in output was modest—GDP
economy provided 129.7 million jobs, some fell by 1.3 percent. The fall in employment
8.7 million (or 6.3 percent) fewer than was similarly moderate—1.6 million jobs,
at the peak, in January 2008, according or 1.5 percent of all jobs. But employment
to Current Employment Statistics data took a long time to return to the
reported by the Bureau of Labor Statistics prerecession level. During the downturn,
(BLS). The unemployment rate rose from which lasted from July 1990 to March
4.7 percent just before the recession to 10 1991, the unemployment rate rose from

American Institute for Economic Research 1

 Introduction

5.5 percent to 6.8 percent and continued in tandem: Employment growth usually
to rise during the jobless recovery which began at around the same time as growth in
followed, eventually reaching 7.7 percent output—that is, soon after the recession’s
by mid-1992. It took more than two-and- trough. And, in every case, employment
a-half years for employment to return to exceeded its prerecession level within a
its prerecession level. It took even longer year of touching the trough, if not sooner.
for the unemployment rate to return to 5.5 The change can also be seen in the
percent, a level that the economy did not volatility of business cycles. Between
revisit until 1996. 1948 and 1985, output fluctuations were
The next recession, in 2001, was even markedly more pronounced than after 1985,
milder in terms of loss of output, but much at least until the most recent recession (see
worse in terms of the prolonged loss of Chart 1). Something in the nature of the
employment. Although GDP did not shrink, business cycles has changed fundamentally,
the number of U.S. jobs fell for another 21 accounting for the different look and feel of
months following the end of the recession post-1985 recessions.
in November 2001, falling to 130.1 million Because the change in the nature of
jobs from 132.7 million, a decline of 2.6 recent recessions appears to be permanent,
million jobs. It took almost four years from or at least long-lasting, it offers insights
the start of the recession for jobs to recover into future recessions. These insights have
to prerecession numbers. implications for individuals and businesses
Such behavior is atypical of earlier preparing to face those recessions. This
recessions in the U.S. (Appendix 1 presents study will discuss implications and explore
the full chronology of U.S. recessions.) the reasons for the change in the nature of
In the eight recessions between 1948 and business cycles.
1990, employment and output moved

CHART 1. Output Fluctuations Flatten in 1985-2007

REAL GDP, 14%

PERCENT
CHANGE 12%
FROM A
YEAR AGO 10%
The Great Moderation
8%

6%

4%

2%

0%

-2%

-4%

-6%
1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

Source: U.S. Bureau of Economic Analysis

2 The Changing Nature of Recessions

 Introduction

Business Cycles—Then and Now on purchases, businesses cut back on

Theories of Business Cycles production, and the economy tumbles into
Business cycles are a recurring pattern recession. As excess production capacity
of economic growth and decline. While is idled and people become unemployed,
every cycle is different it its details, costs, real wages, and interest rates begin
they are all made up of four phases: to fall. Eventually, this leads to improving
expansion, crisis, recession (or depression), profit margins, pent-up consumer demand,
and recovery. These stages can be and an improved outlook for investment.
characterized in the following manner. As business investment picks up, the
recovery begins, sowing the seeds for a new
Expansion: Business is good, sales expansion.
and profits are rising, unemployment Newer theories of business cycles have
is low, and wages are rising. posited other possible causes of recessions.
Crisis: Stock markets fall, input prices begin These views can be divided into two broad
to rise, cost of capital rises, inventories approaches. The first considers recessions
rise, new orders fall, business failures to be the result of processes natural to the
accumulate, household debt expands, economy: an organic part of the growth
and personal bankruptcies accumulate. and evolution of an economy as it responds
to innovations, changes in technology
Recession (or depression): Sales, investment,
and taste, and demographic forces,2 and
and output fall first, while employment
not simply the outcome of investor over-
falls later, followed by a drop in
optimism born during boom times. Slowing
income and government revenues.
demand and tougher economic conditions
Recovery: Once companies and households weed out the less efficient companies and
have adjusted—a change that usually business practices. Businesses become more
results in lower production costs—the efficient—by cutting costs, figuring out new
economy begins to recover; companies production techniques, or improving service
expand investment, replenish inventory, to attract customers. As a result, the overall
giving rise to output and income; and efficiency of the economy improves.
eventually employment rises, further The second modern view sees recessions
boosting incomes and consumer spending. as disruptions that interrupt the otherwise
The causes of recessions are a matter smooth growth trend of the economy. These
of debate. Traditional views of recessions shocks can be external to the economy,
consider them to be the result of an such as a sharp increase in the price of oil
overheated economy driven by expectations driven by international events, or they can
of continued growth and easy credit.1 In this be economic policy shocks, such as shifts
view, businesses respond to the expansion in monetary policy or government fiscal
by investing in additional production policy that affect business costs and labor-
capacity to meet expected growing demand market dynamics and cause overall output
for goods and services. Consumers, on the to shrink.3
other hand, borrow in expectation that their This perspective has contributed to the
incomes will continue to grow. recurring notion that business cycles and
At a certain point, business investment recessions can be eliminated—if only policy
overshoots the consumers’ ability to actions can be calibrated to counteract the
support the new production, as consumer shocks that disrupt the smooth growth
debt outpaces the growth in wages path of the economy. Indeed, toward the
needed to sustain it. Consumers cut back end of the long business-cycle expansion

American Institute for Economic Research 3

Introduction

thought of as a combination of simple and

structural, created by shocks that interrupt
It remains to be seen whether the economic growth, or by accumulations
attributes of the alleged “new economy” of structural shifts that force massive
will ameliorate or exacerbate the effects reallocations of capital and workers.
But whatever the specific trigger, there
of the next business-cycle reversal,
is growing evidence that the fundamental
whenever it comes. That it will come is
nature of recessions has changed. Writing
not in serious question. in early 2007, Robert Hall, the chair of
the Business Cycle Dating Committee
for the National Bureau for Economic
— AIER, What Will the Research, the arbiter of the peaks and
Recession Mean to You? troughs of U.S. business cycles, has referred
to the two recessions after 1990 as being
“modern recessions.”5 Hall argues that
the environment in which they occurred
differs from earlier recessions in at least
of the 1990s, some began to wonder if
two dimensions: the reduced portion of the
the U.S. economy had entered a new age
labor force represented by factory workers
of no recessions, until the business cycle
and a well-executed monetary policy.
reasserted itself with the recession of 2001.
Hall’s analysis points to the possibility
AIER weighed in on this debate shortly
that significant changes in the way our
before the recession of 2001 was officially
economy works have altered the nature
announced.4 After considering factors that
of recessions and subsequent recoveries.
were believed to be capable of mitigating the
Hall was writing before the 2007 recession
severity of future recessions, ranging from
became apparent and thus could not include
government policy to globalization and the
it in his analysis. This study will argue that
new Internet economy, we concluded that
the modern recessions, including the 2007
it was premature to think that recessions
downturn and recovery, do indeed differ
had disappeared or would be milder in the
from the earlier ones. Specifically, the data
future. The subsequent recession in 2001,
show that since the late 1980’s, recessions:
and the Great Recession beginning in 2007,
have borne out our conclusion.
• Have become less frequent;
Modern Recessions Are Different • Tend to be followed by a jobless
While economists may differ in their recovery, which is defined by the growth
views of the primary causes of economic in output without a corresponding
fluctuations, most would agree that all of increase in employment; and
the forces described in both the traditional
and modern theories of business cycles • Feature permanent layoffs, as opposed
are present at one time or another. to temporary ones, more prominently.
Human exuberance and fear come into
play, as well as technological change and The Frequency of
demographic shifts. Global shocks have Recessions Has Declined
an impact on a country’s business cycle. An important aspect of the changing
So do government decisions that are nature of recessions has been the decline
made for economic and noneconomic in their frequency. Figure 1 shows the
reasons. Consequently, recessions can be business cycles since 1948, emphasizing the

4 The Changing Nature of Recessions

 Introduction

FIGURE 1. Recessions have become less frequent since 1990

MONTHS Length of Preceding Expansion (months) Recession Duration (months)

37 45 39 24 106 36 58 12 92 120 73

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Source: National Bureau of Economic Research

duration of expansion in each. Prior to the it took to regain past employment levels.
mid-1980’s, seven out of eight expansions In the modern recessions, employment
lasted less than five years (60 months). continued to be depressed for many months
The situation has changed drastically after output started to rise. Consequently,
since then. The modern recessions, which employment took longer to return to
started in July 1990, March 2001, and its prerecession level than in any of the
December 2007, followed three of the four earlier recessions. All three recoveries were
longest expansions on record, averaging jobless, irrespective of whether the fall in
almost eight years between downturns. employment was large, as in 2007 recession,
While long expansions have occurred or small, as in 1990 recession.
before, those were the exceptions not the Of the three modern recessions, the 1990
rule. The long expansion from February recession exhibited the fastest recovery
1961 to December 1969 was bracketed by in employment. Still, the recovery period
two fairly shorter expansions: a 24-month was a long one—31 months passed before
expansion from April 1958 to April 1960 employment exceeded its prerecession level.
and a 36-month expansion from November And this was after a fairly mild recession in
1970 to November 1973. Prior to 1990, terms of job losses—from peak to the lowest
never did we have three business-cycle value, employment fell 1.4 percent.
expansions in a row lasting more than six Of the earlier cycles, the 1981
years each. recession exhibited the longest recovery
of employment: It took 28 months for
Jobless Recoveries employment to surpass its prerecession
A look at how long it took for employment level. But this was after a fairly severe
to return to its prerecession levels shows downturn, in which employment dropped
a consistent shift beginning with the 3.1 percent from peak to trough. In other
1990 downturn. Chart 2 on page 6 shows words, in 1981, the fall in employment was
the trajectory of employment for the 11 twice as bad as in 1990, yet employment
recessions since 1948, comparing the recovered faster than in 1990.
length of time between prerecession This fact—that in modern times, the
peak employment and the returns to return of jobs is slower even after milder
that level following the downturn. recessions than it was in earlier periods
The three most recent recessions clearly after more severe recessions—points to the
surpass all previous ones in terms of the time possibility that the relationship between

American Institute for Economic Research 5

 Introduction

CHART 2. Getting Back to Pre-Recession Employment Levels

1%
PERCENT Jul 1990 Mar 2001 Dec 2007
DEVIATION Recession Recession Recession
0%
OF PAYROLL
31 46 77
EMPLOYMENT
-1%
FROM PEAK
VALUE
-2%

-3%

-4%

-5%
Pre-1990 Recessions
-6%
Post-1990 Recessions

-7% 31 Time in months to regain pre-recession

employment level
-8%

-9%
Peak 6 12 18 24 30 36 42 48 54 60 66 72 78 84

MONTHS SINCE START OF RECESSION (PEAK)

Source: U.S. Bureau of Labor Statistics

output and employment has changed in temporary and permanent layoffs for all
modern recessions. Careful analysis of data people who lost jobs in the seven recessions
reveals this to be the case. since 1967. (Data on layoffs are not available
In modern recessions, be they mild prior to 1967.) In the four recessions prior
like in 2001 or severe like in 2007-2009, to 1990, permanent layoffs on average,
employment falls far more than it did accounted for 63 percent of all job losses. In
during earlier recessions with similar output contrast, during the three modern recessions
declines. (The full computation showing permanent layoffs accounted for 72 percent
this is presented in Appendix 2.) It appears of all job losses. The most recent recession
that workers are hit harder in modern shows the highest level of permanent
recessions, even in mild ones, than in earlier layoffs at 78 percent of all job losses.
cycles. This is yet another manifestation In all recessions, most layoffs are
of the trend towards jobless recoveries. permanent rather than temporary. But
in modern recessions, the share of
Layoffs Become Permanent permanent layoffs among people who
Another feature of today’s recessions is that have lost jobs is even higher, which is
permanent layoffs tend to be more prevalent one reason for the slower pace of jobs
than in the earlier downturns, indicating the recovery. When the economy begins to
more structural nature of modern recessions. grow after a recession, those on temporary
Chart 3 on page 7 shows the split between layoffs can be called back quickly. But

6 The Changing Nature of Recessions

 Introduction

CHART 3. Permanent Layoffs Gain in Importance

100%

COMPOSITION 90%
OF JOB LOSERS–
AVERAGE FOR THE 80%
PERIOD OF EACH
RECESSION 70%

60%

50%

40%

30%

20% On temporary Layoffs

On Permanent Layoffs*
10%

0%
Dec Nov Jan Jul Jul Mar Dec
1969 1973 1980 1981 1990 2001 2007

R ERECESSIONS, LABELEDBY
CE SSI O NS, LABELED BY TTHEIR
H EIR START
START DATE
DAT E

* Also includes persons who completed temporary jobs.

Source: U.S. Bureau of Labor Statistics

people who were laid off permanently vulnerable and jobless recoveries more
have to look for another job, possibly in a likely in the subsequent expansion.
different sector or geographical area, which The rest of this study explores the
takes more time. underlying forces responsible for this
The data on the frequency of recessions change. These forces appear to be
and the profile of employment losses permanent, or at least long-lasting,
suggests that over the past 30 years, suggesting that future recessions will
there has been a change in the nature likely be accompanied by a large loss of
of recessions and recoveries. Something employment and a subsequent jobless
fundamental has changed that has recovery. This has implications for people
reduced the incidence of recessions, and businesses, which are outlined in the
but has made employment more closing section.

American Institute for Economic Research 7

 The Forces Behind Change: A Shift to Structural Recessions

02 The Forces Behind the Change:

A Shift to Structural Recessions

The distinction between simple and in the mix of products or in production

structural downturns helps explain techniques or labor skills are required.
why recessions look different after the The other type of recession is triggered by
mid-1980’s. For the reasons outlined the need for deeper structural adjustments
below, simple recessions have essentially in the economy. This can come about as
disappeared. U.S. business cycles have a result of an unexpected shock to the
shifted from a mix of both simple and economy that has lasting consequences,
structural recessions to pure structural such as a sharp increase in oil prices
recessions, which occur less frequently, but requiring many processes in the economy
entail more severe employment losses. to become more energy efficient. Or it can
Simple recessions involve a reduction come about as a result of accumulated
in demand due to factors that are likely imbalances that can no longer be ignored,
to be temporary. Here we will call these such as overinvestment in some segments
factors simple demand shocks and the of the economy, such as the dot-com
recessions that follow simple recessions. An or housing sectors. We will refer to the
example of a simple demand shock could recessions that happen under these
be a shock to international trade, such as a circumstances as structural recessions.
slowdown in the economies of our trading The essential difference between a
partners or a strengthening of the dollar. structural recession and a simple one
This is approximately what happened in lies not in the types of shocks that are
the period leading up to the recession that present during recession, but rather in
started in August 1957. A strengthening the adjustments required to recover from
of the dollar followed by lower demand the downturn. A recovery from a simple
for U.S. exports caused businesses to slow recession for the most part consists of a
production. Once foreign demand recovered, return to the way things were prior to the
U.S. businesses restored production and recession. In contrast, a recovery from
employment to prerecession levels. The a structural recession requires deeper
economy returned to its prerecession state adjustments in production processes,
fairly rapidly. The recovery from a simple products, and services, and in the
recession, such as the one in 1957, entails skills and knowledge of workers. The
the economy returning to producing not shift away from simple recessions and
only the same level of output that it did prior toward structural recessions explains
to the recession, but also the same kinds of the changing nature of business cycles
goods and services. No significant changes that we see in recent decades.

American Institute for Economic Research 9

Chapter 2

In reality, every recession is made up of primarily a structural one, driven by the

a mix of both simple demand shocks and bursting of the dot-com bubble and the
structural adjustments. However, there is a resulting reallocation of resources out of
fundamental difference in the way simple high tech sectors. In two years between
demand shocks and structural adjustments 1998 and 2000, the tech-heavy NASDAQ
play out in the economy. Therefore, those index more than doubled, reaching a level
recessions that are brought about primarily that it has yet to regain some 15 years later.
by simple demand shocks will have different Such growth was not sustainable, and the
effects than those that are brought about bursting of the tech bubble saw the NASDAQ
primarily by structural adjustment factors. fall back to 1998 levels. This made it clear
For example, the recession of 1981- that resources had been misallocated and
1982 was primarily a simple recession. It exposed the need for a structural adjustment.
was triggered when the Federal Reserve The terrorist attacks on September 11,
sharply increased interest rates to combat 2001, came about six months into the
inflation. This resulted in a sharp increase recession and clearly damaged consumer
in borrowing costs for consumers and and business confidence, introducing a
businesses, which is a simple demand demand shock into the midst of a structural
shock, not a structural one. Still, some recession. Still, these demand shocks
structural changes were present. There played a secondary role and the recession
were changes in consumer preferences was mostly structural, characterized by a
and an expansion of foreign competition jobless recovery that followed substantial
in the automotive industry. There were job losses in the face of a very mild effect
the technological advances of early on output. The number of jobs fell by
computers. There were new developments almost 2 percent at the lowest point,
in inventory management. All of these while output was hardly affected. It took
changes necessitated a transformation of almost four years before the economy
production techniques and reallocation regained all the jobs that had been lost.
of resources in the economy.
However, the main driver of the recession Employment Impacts Are More Severe
was the need to adjust prices and wages Because structural recessions involve
in response to much lower expectations reallocation of resources, including people,
of inflation that were the result of the across sectors of the economy, they entail
higher interest rates set by the Federal more severe and more protracted job losses,
Reserve. This adjustment could occur which are the features we observe in all
without much structural reallocation. modern recessions. (See Appendix 2.)
And once the adjustment was made, the Furthermore, in structural recessions,
recovery was fairly swift, even though permanent layoffs are more prevalent than
the recession had been deep. At the in simple demand slowdowns. In a simple
lowest point, output fell by 2.8 percent recession, businesses can reasonably expect
and employment by 3.1 percent below demand for their products to return to
their values at the start of the recession. prerecession levels at some point soon.
Nevertheless, both output and employment Therefore, it makes sense for companies
recovered to their prerecession levels within to lay off workers temporarily, during
about a year of having reached bottom. the period of slower demand, and to call
In the same way, structural recessions them back when demand picks up.
can also include demand shocks. The In a structural recession, however,
recession that began in March of 2001 was companies can no longer be certain

10 The Changing Nature of Recessions

 The Forces Behind Change: A Shift to Structural Recessions

that demand for their products will The result is that the economy begins to
recover. Total demand in the economy grow as capital improvements take hold,
will eventually recover, but the demand but the laid-off workers are stuck with a
for specific products is likely to be long search for jobs that are drastically
different. For businesses, this means different from the ones they once held.
shifting to producing different goods This process is reflected in the changes in
or services or adopting new production productivity, as measured by the output
techniques (automating some processes, per hour worked (adjusted for inflation)
outsourcing some steps, etc.). A in the nonfarm business sector.
company may need fewer workers or In a structural recession, after the period
ones with different skills because of of initial adjustment, productivity would
changes in the production process. As be expected to grow rapidly, beginning
a result, temporary layoffs no longer even before the recession has ended,
make as much sense as they once did. because it is the successful structural
adjustment that brings about both the
Productivity Cuts into Job Creation rise in productivity and the end of the
Structural shifts also explain why recession. In a simple recession, where
structural recessions tend to be followed businesses are not always forced to rethink
by jobless recoveries. Many of the their production processes, productivity
workers laid off during the recession growth is expected to be slower, all other
are likely to find that their jobs have things being equal. (Because other forces
permanently disappeared. At the same besides structural adjustments also affect
time, businesses, which are trying to stay productivity, productivity can grow
afloat, are streamlining their production even following a simple recession.)
processes, often by cutting labor costs and The data bears this out (see Chart 4).
automating as many steps as possible. In the three modern recessions (marked

CHART 4. Structural Adjustments During Recessions Boost Productivity

INDEX OF REAL 120
OUTPUT PER
HOUR WORKED,
NON FARM 100
BUSINESS
SECTOR
2009=100.
80

60

40

20

0
1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Shaded areas represent U.S. recessions.

Source: U.S. Bureau of Labor Statistics

American Institute for Economic Research 11

 Chapter 2

in blue on the chart), all of which were economy. This appears to be the case in
structural, productivity growth is rapid. the current recovery, as shown by the
Once productivity begins to increase, which Beveridge curve, a relationship between
in all three modern recessions happened job openings (or unfilled jobs) and the
during the recession, it grows by between 5 unemployment rate (see Chart 5).
and 6 percent in the first year. The same is Normally, a higher number of job
true of the 1960 and 1969-1970 recessions, openings is indicative of a more robust
which seem to have been structural. labor market and lower unemployment.
In contrast, in the recession of 1981-1982, This is reflected in the downward slope
which was primarily a simple recession, of the curve. But in the case of structural
once productivity started to grow, it grew unemployment, there are more unemployed
much slower—less than 3 percent in the people for the same level of economic
first year. Productivity growth was also activity and job openings. The increase in
slow following other simple recessions— structural unemployment corresponds
in 1980, 1973-1974, and 1953. In each to the curve shifting outward.
of these recessions, productivity grew This is what happened in the most recent
less than 5 percent in the first year. recovery. When the recession ended in
This same dynamic helps explain the June 2009, the number of job openings,
persistence of unemployment during i.e., jobs that are unfilled by the end of
the recovery from a structural recession. the month, stood at 1.5 percent of the
Structural unemployment occurs when labor force, an extremely low level. By
a large number of unemployed people November 2013, job openings rose to a
hold skills that are different from those much more common level of 2.7 percent of
required by the vacant jobs in the the labor force. Normally, such an increase

CHART 5. Beveridge Curve Shifts Outward in through June 2009

the Jobless Recovery Since 2009 July 2009 onwards
JOB OPENINGS 4.0
(% OF LABOR
FORCE)
3.5

Nov 2013
3.0

2.5

The Beveridge curve slopes down

2.0 because higher level of job openings
represents a more robust labor
1.5 market, which coresponds to lower
unemployment rate.The curve shifts June 2009

1.0 out when an increase in job openings

fails to reduce unemployment
0.5
sufficiently, suggesting a rise
in structural unemployment.

0
0 2 4 6 8 10 12

UN EM PLOYM EN T (% OF LABOR F ORC E)

Source: U.S. Bureau of Labor Statistics

12 The Changing Nature of Recessions

 The Forces Behind Change: A Shift to Structural Recessions

in the number of jobs going unfilled still stood at 6.7 percent, substantially
would signify a significant improvement higher than would be expected given
in the job market and coincide with a the number of unfilled job openings.
substantial fall in unemployment. The likely explanation for higher
In the past, specifically in late-2004 unemployment in the face of fairly high
and early-2005, when job openings job openings is structural unemployment.
similarly stood a bit above 2.5 percent, There is some mismatch between the people
the unemployment rate ranged from 4.9 who are unemployed and the jobs that are
to 5.5 percent, a very healthy level. But available. The skills of the unemployed,
not this time. While the unemployment or their location, may not match those
rate has fallen since June 2009, the sought by employers. Such a mismatch is
improvement has not been commensurate more likely in structural recessions, when
with the number of job openings. By the reallocations within the economy change
end of 2013, the unemployment rate the attributes of jobs being offered.

American Institute for Economic Research 13

14 The Changing Nature of Recessions
 03 The End of Simple Recessions
and Rise of Structural Recessions

In recent decades, several factors have production when demand changes,

combined to reduce the incidence of simple without the cost of carrying unneeded
demand downturns. First, the behavior inventory. A retail chain can change the
of businesses and policy makers has mix of products it sells in response to
changed in ways that reduce the likelihood changing demand, without having to take
of simple recessions. Also, the shift of big losses on unpopular inventory items.
the economy toward service-oriented Managers today are also more attuned
sectors and away from manufacturing to broad economic trends affecting their
has made simple demand shocks less businesses. With the advent of computer
potent. At the same time, the rise of technology, quantitative analysis of
globalization has increased the likelihood economic and industry trends is more
of structural shocks to the U.S. economy. widespread than ever. Many large companies
have analysts on staff to forecast economic
Businesses are Better Able and industry trends of relevance to the
to Plan Production company. Understanding the forces shaping
A number of technological advances the economy and their industry helps
have enabled business to plan better companies to plan for future production.
and adjust more swiftly to changing For example, one of the tasks of the
circumstances, thus reducing the likelihood chief economist at Intel Corp., a leading
of overproduction triggering temporary producer of computer chips, is to forecast
layoffs and production slowdowns. These global demand for semiconductors. Intel’s
business practices make simple recessions team of analysts employs mathematical
arising from production slowdowns and statistical techniques to determine the
and inventory buildup less likely. factors influencing demand for computer
Widespread use of real-time data is chips. Keeping an eye on these factors
helping businesses carry out complex plans alerts Intel to future trends before they
and respond to changing circumstances. fully materialize. This allows Intel to plan
Just-in-time inventory control systems, its investment in productive capacity
which today are employed not only by retail ahead of time, so that the company is
chains but also by many manufacturing prepared to meet future demand.
facilities, make it possible for businesses Such proactive planning, enabled
to adjust rapidly to changing demand by computing technology and data,
conditions. A manufacturer can adjust allows companies to match production

American Institute for Economic Research 15

 Chapter 3

to demand, thus avoiding the cycles of the subsequent pick-up in growth without
overproduction and output cutbacks that the attendant recession (see Chart 6).
often led to simple recessions in the past. Almost four years into a business-cycle
expansion that started in early 1991, the
Government’s Role in U.S. economy started exhibiting signs of a
Managing the Economy slowdown. By the second quarter of 1995,
Despite clear limits to our knowledge GDP growth slowed to a 0.8 percent annual
of the way the economy works, monetary rate, substantially below the average 3.2
policy has been used aggressively by the percent growth in GDP seen during the
Federal Reserve in recent decades in an expansion up to that point. Early estimates
attempt to counteract business cycles available at the time showed GDP growth
or mitigate their effects. The Fed was to be even lower—around 0.5 percent.
especially active in trying to manage the (The figure was later revised upward.)
economy throughout the 1990’s, during Throughout 1995, the index of industrial
the tenure of Alan Greenspan as chairman. production grew extremely slowly, and
Some have credited the Fed’s actions under there were months when it contracted.
Greenspan with helping to prevent some Labor market conditions also worsened.
recessions, such as the engineering of a In all of 1995, the economy added 2.1
“soft landing” in 1995, when economic million jobs, only slightly more than half
growth slowed for a while, but did not the 3.8 million jobs it added in 1994.
turn negative, and then picked up again. The unemployment rate, which had been
The Fed’s adjustments to interest rates, declining, stalled in 1995. Earlier, the
in response to a slowing of the economy, unemployment rate had fallen from a peak
appear to have laid the groundwork for of 7.8 percent in June 1992 to 5.5 percent

Fed
Lowers
Target Faster Growth
Economy Federal and Lower
CHART 6. Soft Landing in 1995-1996 Slows Funds Unemployment
Down Rate Follow
PERCENT 10
Target Federal Funds Rate
Real GDP Growth Rate
8

-2

-4
1990 1991 1992 1993 1994 1995 1996 1997 1998

Shaded areas represent U.S. recessions.

Sources: U.S. Bureau of Economic Analysis, Federal Reserve

16 The Changing Nature of Recessions

 The End of Simple Recessions and Rise of Structural Recessions

in December 1994; but during 1995 it the form of a jobless recovery. The reason
was stuck between 5.4 and 5.8 percent. for this is that while well-timed monetary
A number of other economic indicators, policy actions in theory can prevent simple
such as manufacturers’ new orders, recessions, they cannot avert structural
new housing permits, and sales and ones. And the 2001 recession was structural,
inventories also suggested that the economy brought about by the need to reallocate
might be heading into a recession. resources away from the high-tech sectors
Once the signs of slowdown of the economy. Monetary policy actions
became visible in economic data, the could not erase this need. This is why
Federal Reserve cut its target for the aggressive use of monetary policy can
federal funds rate three times—from potentially reduce the incidence of simple
6 percent in the first half of 1995 to recessions, but not structural ones.
5.25 percent in January 1996.
Lower interest rates tend to promote Employment Shifts from
lending and borrowing and thus fuel Manufacturing to Services
economic activity. The monetary easing A significant shift of employment in the
in late-1995 appears to have worked U.S. from manufacturing to services has
as intended. GDP growth sped up in also reduced the economy’s exposure to
1996, rising to 3.8 percent that year. demand shocks. Demand for products
The economy added 2.8 million jobs in of manufacturing industries is more
1996 and 3.3 million jobs in 1997. By cyclically sensitive than demand for
late-1996, the unemployment rate fell services (see Chart 7 on page 18).
to 5.2 percent, close to the level many Consequently, employment in the
economists consider full employment. And manufacturing sector is more cyclically
it continued falling afterward, dropping sensitive as well (see Chart 8 on page 18).
below 5 percent by the end of 1997. The long-term shift of employment
While it is impossible to know for from manufacturing to services has
certain what would have happened in the intensified in recent decades. In the
absence of the Fed’s actions, it is plausible mid-1960’s, about 27 percent of all
that they helped to avert a recession. If nonfarm workers were employed in
so, the Fed had a hand in creating the manufacturing. By the mid-1980’s, it was
longest economic expansion in postwar 20 percent. Today, it has shrunk to about
U.S. history, which lasted 10 years 9 percent (see Chart 9 on page 19).
between March 1991 and March 2001. At the same time, employment in service-
Again, during the 2001 recession, the providing sectors has increased from less
Federal Reserve, still under Greenspan’s than 50 percent of all nonfarm workers
guidance, lowered the target federal funds in the mid-1960s to about 70 percent
rate from 5 percent at the start of the today. The remaining 21 percent of the
recession in March 2001, to 1.75 percent workforce are employed by the government
by December 2001. But this action failed to at all levels—federal, state, and local. A
produce vigorous growth. In the sluggish majority of government employees, most
recovery that followed, the Fed lowered notably in education, are also engaged
the target rate further—to 1.25 percent in in providing services, making the overall
November 2002 and to 1 percent in June number of people involved in service-
2003, where it stayed until June 2004. providing occupations even higher.
But even this aggressive easing could not This shift from a manufacturing to a
erase the recession or its consequences in service economy does not diminish the

American Institute for Economic Research 17

 Chapter 3

Goods
CHART 7. Spending on Services Less Cyclical Services
15
REAL PERSONAL
CONSUMPTION
EXPENDITURES
BY CATEGORY,
10
PERCENT CHANGE
FROM A YEAR AGO

-5

-10
1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

Sources: U.S. Bureau of Economic Analysis

Shaded areas represent U.S. recessions.

Manufacturing
Private Service-Providing Industries
CHART 8. Employment in Manufacturing More Cyclical Education (state & local government)
15
PERCENT
CHANGE FROM
A YEAR AGO 10
IN PAYROLL
EMPLOYMENT,
SELECTED
5
SECTORS

-5

-10

-15
1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

Sources: U.S. Bureau of Labor Statistics

Shaded areas represent U.S. recessions.

18 The Changing Nature of Recessions

 The End of Simple Recessions and Rise of Structural Recessions

likelihood of structural recessions, but does could trigger structural adjustments have
reduce the likelihood of simple ones. As multiplied. Global economic ties can be
the U.S. economy becomes more service- quantified by the volume of exports and
oriented, factors that would trigger a simple imports relative to the size of the U.S.
demand slowdown are losing their potency. economy (see Chart 10 on page 20). Before
A sudden fall in consumer confidence can 1970, the total value of exports and imports
still reduce the demand for manufactured combined was less than 10 percent of U.S.
durable goods as much as ever, but this does GDP. By 1990, exports plus imports had
not affect as many jobs as it once did and risen to about 20 percent of GDP. Today,
does not depress overall economic activity they stand at around 30 percent of GDP.
to the same degree. Some disturbances that Global trade connections can transmit
once would have led to simple recessions in shocks from other countries to the U.S.
the past now manifest as growth slowdowns. economy. An early example of this was
As a result, recessions are less frequent, and the oil crisis in 1973 when members of
those recessions that do occur are likely the Organization of Petroleum Exporting
to be structural, with an impact on service Countries imposed an oil embargo that
industries as well as manufacturing. led to quadrupling of the world oil price.
The demand for oil in the U.S. was fairly
Globalization Multiplies the inelastic at the time, thus higher prices
Sources of Structural Shifts did not reduce oil consumption by much
As the U.S. economy becomes more globally and led to an increase in the value of oil
connected, the potential for shifts that imports. This contributed to a sharp jump

CHART 9. Employment Shifts from Manufacturing

Manufacturing to Services Private Service-Providing Industries
80%

PERCENT 70%
OF TOTAL
NONFARM
EMPLOYMENT 60%

50%

40%

30%

20%

10%

0%
1939 1945 1951 1957 1963 1969 1975 1981 1987 1993 1999 2005 2011

Sources: U.S. Bureau of Labor Statistics

American Institute for Economic Research 19

 Chapter 3

in imports as a share of GDP (see chart 10). in Mexico was one such example.
Over time, U.S. economy’s global ties Major liberalization also occurred in the
expanded. Two major recent examples textile and apparel trade. From 1974 to
of this are the introduction of North 1995 the United States (and other countries)
American Free Trade Agreement (NAFTA) restricted imports of yarns, fabrics, textile
and the removal of import quotas on products and clothing if domestic industries
textiles and apparel, which were in were threatened by surging imports. This
existence since mid-1970s. NAFTA arrangement was called the Multifibre
came into force on January 1, 1994 Agreement, and it mainly restricted
and removed all trade barriers between imports of textiles and apparel from Asia
United States, Canada, and Mexico. into the U.S., Europe, and Canada.
Because United States and Canada These restrictions were phased out over
already had a free trade agreement, NAFTA’s a ten-year period from 1995 to 2004; by
largest impact was on trade with Mexico. In January 1, 2005, the quotas were gone.
1994 alone, imports of goods from Mexico During this transition period imports of
to the United States rose 24 percent. In apparel, footwear, and households goods
the first 10 years of NAFTA, imports into U.S. almost doubled. Then, between
from Mexico to United States more than 2005 and 2013, they rose another 20
tripled. U.S. exports of goods to Mexico percent. At the same time, imports of
more than doubled. Such large changes cotton, wool and other natural fibers,
in trade flows necessitated structural which can be used to produce textiles
adjustment within both economies. The domestically, shrunk. As a result of the
rise of US-owned maquiladora plants United States switching from producing

Phase-out
of import
CHART 10. Globalization: U.S. Exports and Imports quotes for
textiles
Grow Relative to GDP, faster since 1970s and
apparel
PERCENT 35%
Exports
OF GDP
Imports
Exports + Imports
30%

NAFTA
25%
comes
into force

20%
Oil shock of
1973-74 –
oil price
15% quadruples

10%

5%

0%
1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007 2013

Sources: U.S. Bureau of Economic Analysis

20 The Changing Nature of Recessions

 The End of Simple Recessions and Rise of Structural Recessions

its own textiles to importing already required producers to adjust to slowing

finished apparel, the domestic textile domestic demand. With growing exports
industry was decimated. Many factories and expanding access to foreign markets,
in the Carolinas closed for good. a slowdown in U.S. domestic demand is
Given this increasing global not necessarily detrimental to businesses.
interconnectedness, changes in other Those companies that can export their
countries are more likely to induce output may not be as affected by changes
structural reallocations within the U.S. in domestic demand. (This assumes
economy. This was true as far back as the that foreign demand does not change
1970’s, when the oil price shocks forced in the same way U.S. domestic demand
the U.S. economy to become more energy does. Usually that has been the case, but
efficient, but the realignment did not come the global recession in 2007-2009 has
before undergoing a painful recession. called that assumption into question.)
Competition from Japan’s fuel-efficient cars
in the 1980’s, for example, forever altered New Trends are Likely to Persist
the U.S. auto industry, affecting many jobs The combination of these trends—changes
in the process. At around the same time, in business practices and government
competition from Japan’s steelmakers policy, a shift towards a service-oriented
shook up the U.S. steel industry. economy, and globalization—has
More recently, the outsourcing of resulted in a reduction in the frequency
many kinds of jobs overseas, from textile of recessions and an increase in the
manufacturing to medical transcription likelihood that future recessions will
to computer help desks, is altering involve structural adjustments. The
the job landscape in other sectors simple downturns of the past have been
of the economy. In an economically all but eliminated. But the recessions that
interconnected world, changes in demand cannot be eliminated—the structural
affect commodities, raw materials, and ones, requiring reallocation of resources
energy, which in turn have consequences in the economy, with lasting and painful
for input prices for U.S. producers. effects on employment—are here to stay.
With the U.S. economy more exposed The trends toward a service-oriented
to global forces than ever before, any economy and globalization are likely
number of developments around the to continue. Our understanding of the
world—in Europe, China, Brazil, Japan, economy may not be improving as fast as
and other countries—are potential sources we like, but it is plausible that businesses
of structural disturbances that could will use whatever knowledge is available
trigger the need for adjustments within the to adapt to changing economic conditions.
U.S. economy. This creates an additional Changes in government policy are harder
source of structural shocks, making to foresee, but so far there is no evidence
structural recessions all the more likely. that policy makers will give up their desire
A more globally connected U.S. economy to counteract recessions. Thus, all four
may also mean fewer shocks that could trends that changed the nature of recessions
lead to simple recessions. When U.S. are likely to persist, increasing the odds
producers sold their products mainly to that the next recession will be structural.
U.S. consumers, anything that significantly The next section explores what people
affected consumer demand in the U.S. and businesses can do to prepare for the
next structurally driven downturn.

American Institute for Economic Research 21

 04 Implications: How to Prepare for the Next Recession

The forces that transformed recessions a shifting labor market, they may find
in recent decades are here to stay, at least themselves without work and unemployed
for the foreseeable future. This means for a much longer time than anticipated.
that the next recession will likely be The average length of unemployment has
structural, characterized by fundamental risen in the aftermath of every recession
shifts in the economy. Consequently, the (see Chart 11). But in modern recessions,
economic recovery that follows is likely it remains elevated for years after the end
to entail some changes in the sources of the recession. This is especially true
and nature of supply and demand. of the most recent recession in 2007-
This often translates into recoveries 2009, when the average duration of
that are “jobless”, i.e., characterized unemployment reached an unprecedented
by an especially slow return of jobs. 41 weeks. Even now, some five years
Those who ignore the changing nature after the end of the Great Recession,
of business cycles may pay a high price the average length of unemployment
for their ignorance. And as a result of remains well above 32 weeks. The Great

CHART 11. Impact of Recessions: Firm Deaths Avg. Duration of Unemployment (Left Axis)
and Lasting Unemployment Firm Deaths (Right Axis)
WEEKS 45 250,000 NUMBER
OF FIRMS
40

200,000
35

30
150,000
25

20
100,000

15

10
50,000

0 0
1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1997 1990 1993 1996 1999 2002 2005 2008 2011 2014

Sources: U.S. Bureau of Labor Statistics

Shaded areas represent U.S. recessions
American Institute for Economic Research 23
Chapter 4

Recession caused companies to retrench, Both people and businesses need to

laying off employees en masse and become more economically resilient,
hiring only cautiously. A similar pattern immunizing themselves against
may be repeated in future recessions. changes with the potential to harm
If shifts in markets for products and their economic well-being. Resiliency,
services catch businesses unprepared, however, involves taking those measures
companies could find that their business that are tailored to each group.
is structured for an economy that no
longer exists, endangering their very Resiliency Strategies for Individuals
survival. The number of firms going out No one is immune to the fallout from
of business rises in recessions. It jumped structural shifts in the economy, but
sharply in the two recent recessions forewarned is forearmed. Even in the
characterized by structural shifts in the depths of the Great Recession, 90 percent
economy (see Chart 11). (Data on firm of the workforce was employed. But
deaths is not available prior to 1992.) because it is difficult to predict which
The structural upheaval of the last occupations and industries will be affected
recession should be a wake-up call to by structural shifts, people would be well
individuals and companies alike. Both advised to make themselves as marketable
would be well served by preparing as possible—not only to employers in
themselves for whatever structural one’s current industry but to employers
economic changes lie ahead. in other, diverse industries, where there
The changes in the nature of business may be a need for one’s skill set. New
cycles also make many of the government approaches to employment may be
programs traditionally aimed at helping necessary to home in on the widest range
people weather a recession less effective. of potential markets for one’s abilities.
Many programs, such as unemployment
insurance, are designed to provide resources
to people temporarily, assuming that they To create a
will be able to find other employment in Career Business Plan,
that window. Such programs are tailor- first identify:
made for a simple recession, where
economic activity falls for a time, but
then returns to its prerecession state and • What you like doing and don’t like doing
people go back to their prerecession jobs.
But such measures do not work well • What success looks like to you
in a structural recession, where people
need help in adjusting to new realities. • What motivates you
It is possible that policies will change
in the future in response to the new • Your strengths and weaknesses
nature of recessions, but so far there is no
indication of such a change. Expecting • Your personal priorities
the government to alter policies that have
been in place for decades is not a winning • Who can help
strategy for preparing oneself for the next
recession. Individuals and businesses
would do better by relying on themselves. Source: Stephen Bruyan-Langer, The Personal Business Plan:
A Blueprint for Running Your Life (John Wiley & Sons, Inc. 2013)

24 The Changing Nature of Recessions

 Implications: How to Prepare for the Next Recession

1 Create a business plan for your career. can acquire new skills easily, and are
One way to prepare for job loss in a not anchored to a single location—in
structural recession is to imagine the other words, if they are nimble.
worst. How would you operate without Staying nimble, cross-trained, and
the steady income stream provided by cross-trainable may help you avoid the
your current employer? Your savings displacement that recessions bring.
may last only so long, and the duration Consequently, the most important
of unemployment is uncertain (currently ability one can foster is the ability to
averaging around 32 weeks). Would you learn. Some best practices can help:
be forced to join the ranks of the self- Cultivate your learning agility by knowing
employed? You would not be alone. how to use learning tools—and by using
A 2013 survey found that while 8 percent them. Many of the modern learning
of adult Americans were independent tools rely on computers and information
workers at the time of the survey, 32 technology. There is little reliable data
percent have worked as independent on the level of computer literacy among
workers at some point during their U.S. adults, but computer literacy is
careers.6 (Independent workers, in increasingly important in today’s world.
this survey, include the self-employed, It is clear that most good jobs require an
independent contractors, business ability to use computer technology. At
owners, consultants, freelancers, and the same time, inexpensive access to a
creative professionals, among others.) growing range of knowledge is available
This possibility suggests that it’s never to those who are comfortable using
too soon to start thinking of yourself as computer technology to acquire it.
a business. Creating a business plan for Develop transferable knowledge, skills,
your career can help you cope with the and abilities, which can be applied in
uncertainty, use time more productively other industries and other occupations.
on activities that advance your objectives, Occupational experts distinguish between
and identify resources and people who knowledge, skills, and abilities.7
can help you. The first step requires some “Knowledge” refers to specific content
deep-dive introspection. Ask yourself or procedural know-how. Knowledge
questions to identify the direction your gained from working in a specific job may
career ideally should take (see page 24). or may not be transferable to other jobs.
After setting your overall objective, take For example, knowledge of particular
the steps necessary in helping you achieve regional regulations pertaining to, say,
it. First, establish goals for your career, construction, is not easily transferable to
lifestyle, geography, and income. Then jobs in sectors other than construction.
decide how best to pursue these goals. But knowledge of generally accepted
Finally, continually review your progress as accounting principles would be applicable
you go along and revise your approach as to any business in any industry that
you learn what works and what doesn’t. needs to prepare financial statements.
“Skills” comprise content knowledge as
2 Learn how to learn: Invest time in well as processing and problem solving.
deepening fundamental learning skills Skills often facilitate learning in other
and broadening your expertise. fields, so skills tend to be transferable. For
As structural changes ripple through example, computer-coding skill can be
the economy, workers will best be able applied in a variety of occupations—from
to adjust if they have transferable skills, software engineers to data clerks who

American Institute for Economic Research 25

Chapter 4

maintain databases. Math skills, from simple for a loop. A clear-eyed, realistic view of
numeric literacy to performing complex where your company and occupation may
computations, are applicable to and valued be heading can help you assess future
in a wide array of occupations. Writing job prospects and inform your decisions
skills are also valuable in many settings. about how best to position yourself and
“Abilities” are enduring, developed remain marketable to future employers.
personal attributes that influence There are several vehicles for tracking
performance at work—similar to the broad economy, your industry, and
“aptitudes.” These include traits such your occupation. Some examples include:
as paying attention to detail, being The Federal Reserve’s bimonthly
a fast learner, having a knack for Summary of Commentary on Current
numbers, or being an outgoing person. Economic Conditions by Federal Reserve
They too are often transferable. District, better known as the Beige Book, so
Seek out company-sponsored training called because of its cover color. This report
and education. Many companies provide includes the views of selected businesses
opportunities for their employees to acquire in each of the Fed’s 12 economic regions,
training and upgrade their skills. Find out operating in a variety of sectors. It can
which opportunities your employer offers be found at http://www.federalreserve.
and take advantage of them, focusing on gov/monetarypolicy/beigebook/.
developing the skills that are likely to be AIER publishes monthly analyses of
transferable. This can be an especially current economic conditions based on its
attractive proposition if the cost is covered statistical indicators at https://www.aier.
by the company (fully or partially). org/research/business-cycle-conditions.
Spending on employee training by U.S. The U.S. Bureau of Labor Statistics offers
organizations is substantial, according a wide variety of economic information
to the American Society for Training & products to track industry trends at regional
Development (ASTD). U.S. organizations and local levels on a monthly, quarterly,
spent approximately $164.2 billion and annual basis. It also publishes the
on employee learning in 2012, down Occupational Outlook Quarterly, which
from $171.5 billion during 2010, discusses trends in various occupations
up from $125.8 billion in 2009.8 (http://www.bls.gov/ooq/home.htm).
Be prepared for a new career. A survey The Center for Economic Studies of
conducted by AIER in 2013 found that the U.S. Census Bureau provides detailed
20 million Americans have tried changing information on the geography of work
careers after the age of 45 and that 80 and business through its Longitudinal
percent succeeded.9 According to the survey, Employer-Household Dynamics program
one key to success in changing careers (http://lehd.ces.census.gov/).
later in life is developing transferable
skills and focusing career changes on areas 4 Build sound finances while employed.
where existing skills can be applied. The rising risk of structural recessions
and the possibility of prolonged
3 Stay informed about the economy, your unemployment increase the importance
industry, company, and occupation. of building a sound financial base
One of the most valuable assets in adjusting while employed. The key elements of a
to job change is time. Leverage the value of resilient financial foundation are saving
lead-time by keeping abreast of the direction regularly, managing debt and protecting
of the economy before its shifts throw you personal credit, and investing wisely.

26 The Changing Nature of Recessions

 Implications: How to Prepare for the Next Recession

Saving for a rainy day. There are a number central rules for sensible investing include
of ways to build an emergency fund to avoid taking advantage of tax-deferred accounts,
having to tap into retirement savings in the diversifying investments, and keeping
event of unemployment. The best strategies investment management fees low.13
are designed to make saving automatic and
routine. These include having a portion of Resiliency Strategies for Businesses
your earnings automatically deducted from Structural shifts bring changes in demand
your paycheck and deposited into a savings for products and services. To be resilient
account. Another strategy is to “pay yourself to structural recessions, companies should
first” by making a deposit into a savings adopt production processes and business
account when paying monthly bills. Yet models designed for a world of change.
another approach is, after paying off a debt, Here are some strategies to consider.
continue to make an equal payment, but
this time into your own savings account. 1 Retool your existing workforce for
Managing debt. Given the liberal terms adaptability.
under which many lenders are willing Since companies will have to adapt
to extend credit, it is easy to accumulate and change with every recession,
more debt than is prudent. Keeping debt they need employees who will be
under control is essential to maintaining able to adapt and change as well.
a resilient financial position. Watch out One way that companies have adapted
for signs of developing unsustainable to the changing economic environment is
debt, such as being unable to accumulate the increased use of temporary employees.
emergency or retirement savings, This can be seen in the rising employment
making only the minimum payment on in temporary-help agencies relative to total
credit cards, and using credit cards to
pay for necessities like groceries.10
One of the strongest tools for getting
and keeping debt under control is a family [F]irms across the globe that
budget. Listing your income and expenses apply accepted management
and prioritizing expenditures can provide
practices well perform significantly
a good guideline for prudent spending and
better than those that do not.
paying down debt. Numerous tools exist
to help one create and stick to a budget.11 — Management Practice & Productivity:
If your debt situation is serious, legitimate Why They Matter, LSE’s Centre for Economic
credit counseling organizations can help Performance and McKinsey & Company
get your finances under control. However,
it is important to select an organization that
is affordable and focuses on the interests
of borrowers rather than creditors. [C]ompanies that use progressive
Investing wisely. The relentless erosion strategies…can also ride the momentum
of the purchasing power of the dollar by after a recession is over. Their approach
inflation means that earnings depreciate doesn’t just combat a downturn; it
almost as soon as they are earned. can lay the foundation for continued
Maintaining the financial value of savings success once the downturn ends.
requires taking risks by investing some
portion of savings. The literature on “Roaring Out of Recession.”
investing sensibly is extensive. Three Harvard Business Review, March 2010

American Institute for Economic Research 27

 Chapter 4

CHART 12. Use of Temporary Employees Rises Over Time

TEMP AGENCIES 3.0%
EMPLOYMENT
AS A PERCENT
OF ALL PRIVATE 2.5%
EMPLOYMENT

2.0%

1.5%

1.0%

0.5%

0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Sources: U.S. Bureau of Labor Statistics

Shaded areas represent U.S. recessions.

employment. Since 1990, the earliest year to update one’s skills is no longer a perk,
for which we have data, employment at but rather a necessity for everyone.
temporary-help agencies almost doubled Three points of advice:
(see Chart 12). And this does not include
Help workers adjust. With structural
the temporary employees that companies
recessions now expected to be the norm,
hire without the involvement of an agency.
training, retraining, and upgrading of
But such a strategy results in costly
employees’ skills should be business
worker turnover; the resources invested
as usual, not viewed as a promotion
in training one temp are lost when the
prerequisite or perk for the chosen few.
assignment ends.
A better strategy is to invest in enhancing Focus on frontline workers. Training
the skills of existing workers and retraining needs to extend to the lower end of the
existing employees for future workforce organization’s ladder. Most of the $164
needs. Through retraining, companies billion in training expenditures made by
get to keep their existing workforce— companies in 2012 was focused on middle
preserving institutional memory and and upper management. A growing number
building loyalty—and avoid the search of firms are discovering the benefits of
costs involved in hiring new workers. investing in upgrading the skills of workers
Moreover, research shows that at the lower rungs of the organization.15
employees who are thriving, including Partner with other businesses and civic groups.
through access to learning, are more Collaborations with other companies and
productive.14 This means new kinds of other stakeholders—foundations, industry
thinking about workforce development on groups, etc.—can help meet worker training
the part of businesses. Access to training needs. Partnering with other organizations

28 The Changing Nature of Recessions

 Implications: How to Prepare for the Next Recession

that have similar skill-development needs the challenges that accompany a recession
can help defray costs and provide a critical can affect their ability to survive. Resilient
mass of training capacity to be shared firms reduce costs during downturns by
across companies. The National Fund for improving operational efficiency, rather
Workforce Solutions is a consortium of than by simply cutting staff and capacity.
national and local foundations that partner But the firms that survive the recessions
with employer groups to provide training and also outperform rivals during
to lower- and middle-skill workers. recoveries are those businesses that make
strategic investments in new product
2 Adopt business management development and in plant and equipment.17
best practices.
Perfecting management practices allows 3 Engaging customers in innovation.
firms to improve profitability and weather Business management experts are putting
structural changes. The management a new spin on the old truism, “The
practices most effective in boosting customer is always right.” Increasingly,
business performance are well known and they see a big role for end-users in driving
publicly available. They include things like or supporting companies’ innovation
maintaining lean production processes, in products and services. The key to
using key performance indicators to launching innovative products and services
track progress, setting explicit targets for that customers will want to pay for is
the company that cascade down from to keep connected to your consumer:
top management to individual workers, Know how your consumers consume,
rewarding high performance, and attracting how they’d prefer to consume, and what
and developing talented people. would solve their problems. Then involve
Management practices can be as customers in shaping the product.
important to firm performance as increased MIT Sloan School of Management
investments in workers and equipment. Professor Eric von Hippel’s work focuses
A 2007 study of management practice on the contributions that end-users make
and productivity found that a single in the development of new industrial and
point improvement in a management consumer products. Von Hippel found
practice score is associated with the that millions of consumers in the U.S., the
same increase in output as a 25 percent U.K., and Japan innovate by creating and
increase in the labor force or a 65 percent modifying consumer products to better fit
increase in invested capital.16 Yet, the their needs. He suggests that companies
same study found that best management encourage consumer innovation rather
practices are not widely adopted among than prohibit it with copyright laws.
companies or across countries.
Adoption of best practices depends on
the skills and abilities of management and
staff. For example, companies that employ It is the entrepreneurial activity of
professional managers and base hiring on creating and satisfying new wants
merit outperform those that rely on family that keeps the system humming. This
members or political appointments. The activity uses the labor and purchasing
study found that better-managed firms also power released by efficiency in the
have a more highly educated workforce satisfaction of old wants.
among both managers and line workers.
The ways in which businesses respond to —Amar Bhide, The Venturesome Economy

American Institute for Economic Research 29

Chapter 4

He encourages companies to reorganize reputations whether firms engage them

production to efficiently accept and build or not. Having a strategy for customer
upon prototypes developed by users.18 engagement is, therefore, useful. Successful
Amar Bhide, a professor at Tufts firms elect to find ways to bring customers
University, sees “venturesome consumption” into the business decision-making process.
as one of this nation’s competitive The IBM study found that outperforming
advantages.19 An example of this concept is enterprises are 54 percent more likely
early adopters using preliminary versions than underperforming ones to collaborate
of software applications and providing extensively with their customers.
feedback for improving subsequent versions Increasingly, business thinkers are
of the software. Open-source software extolling the value of becoming a customer-
takes this concept to its extreme, with centric organization, which means managing
users shaping product development to the totality of customer experience with
meet their needs. “Product development the company or brand, throughout the
involves a juggling act,” Bhide says, “in entire time of being a customer. 22
which innovators pay close attention to
what customers say and want but exercise Be Ready for Change
their judgment about when and what Recessions are an unavoidable reality
to implement in their products.”20 of all market economies. They cannot
A growing number of corporations be prevented. The best anyone can do is
appear to be heeding the advice to to be prepared. The trends that changed
engage consumers in enhancing business recessions in recent decades tell us that
performance. In interviews with more than future recessions will likely bring shifts in
4,000 corporate executives in companies the economy that are difficult to foresee.
around the globe, IBM’s Institute for To survive, and even thrive, in a world of
Business Value found that the majority unrelenting change, people and businesses
believes customers should not only play have to stay informed, be nimble, and be
an extensive role in product development, ready and able to adjust and innovate. The
but also in influencing business strategy.21 next recession, whatever its underlying
The rising use of social media by cause, and irrespective of whether it is mild
consumers to share their opinions means or severe, will mean change. Being well
that customers are influencing business prepared can make it a change for the better.

30 The Changing Nature of Recessions

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32 The Changing Nature of Recessions

 Appendix 1

Appendix 1: U.S. business-cycle expansions and contractions

PEAK MONTH TROUGH MONTH

(start of recession) (end of recession/start of expansion)

December 1854
June 1857 December 1858
October 1860 June 1861
April 1865 December 1867
June 1869 December 1870
October 1873 March 1879
March 1882 May 1885
March 1887 April 1888
July 1890 May 1891
January 1893 June 1894
December 1895 June 1897
June 1899 December 1900
September 1902 August 1904
May 1907 June 1908
January 1910 January 1912
January 1913 December 1914
August 1918 March 1919
January 1920 July 1921
May 1923 July 1924
October 1926 November 1927
August 1929 March 1933
May 1937 June 1938
February 1945 October 1945
November 1948 October 1949
July 1953 May 1954
August 1957 April 1958
April 1960 February 1961
December 1969 November 1970
November 1973 March 1975
January 1980 July 1980
July 1981 November 1982
July 1990 March 1991
March 2001 November 2001
December 2007 June 2009

Source: National Bureau of Economic Research

American Institute for Economic Research 33

 Appendix 2

Appendix 2: Comparing output loss and employment

loss in postwar recessions

An important aspect of the change in the number of percentage-point-years lost.

nature of recessions is the shift in the The measure captures the severity of a
relationship between the decline in output loss of output, both in cases where the
and decline in employment. Modern output drop is sharp but short-lived
recessions seem to exhibit heavier job losses and in cases where the drop is mild but
than did many of the earlier recessions, longer-lasting. For example, if output
even when output decline is mild. falls by 3 percent for one year and then
Here we take a detailed quantitative immediately recovers to the previous
look at output losses and job losses in level, the cumulative loss of output is 3
all 11 postwar recessions in the United percentage-point-years. If output falls by 1
States. The analysis shows that all percent, stays at this lower level for three
recessions fall into two groups, one with years, and then returns to the pre-recession
heavier job losses and the other with level, the cumulative loss would also be
much milder ones. All modern recessions 3 percentage-point-years. The loss of
belong to the heavy-job-loss category. employment is computed in the same way.
The table below compares the severity of The last column shows the ratio of
total employment loss to the severity of total the loss of employment to the loss of
output loss in all recessions since 1948. output, reflecting jobs lost for every unit
The cumulative loss of output is of lost output. The ratio allows us to
measured from the start of the recession properly compare the impact on jobs in all
to the point when output returns to its recessions, irrespective of how much (or
prerecession level. It is computed as the how little) output fell in each one. Higher

Cumulative loss Cumulative loss Ratio

of GDP of employment loss of employment
Recession start date (percentage-point-years) (percentage-point-years) per loss of GDP

Heavy March 2001 0.31% -4.68% -15.26

Employment
Loss December 1969 0.14% -0.49% -3.47

April 1960 -0.25% -2.07% 8.18

July 1990 -0.70% -2.39% 3.42

November 1948 -1.29% -4.18% 3.23

December 2007 -6.55% -21.17% 3.23

Milder August 1957 -2.07% -3.68% 1.78

Employment
Loss July 1953 -2.22% -3.66% 1.64

July 1981 -3.18% -3.75% 1.18

January 1980 -1.14% -0.31% 0.27

November 1973 -2.77% -0.47% 0.17

Source: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, author’s calculations
Modern recessions in bold

American Institute for Economic Research 35

Appendix 2

values of the ratio mean more jobs lost these recessions, the “loss of output” is
for the same decline in output, and thus computed through the official end of the
represent recessions that are, in a way, recessions.) But employment did decline
worse for workers. during these recessions. One could argue
The rows of the table are ordered by that these recessions were particularly bad
the values in the last column, so that for workers because they lost jobs even
recessions at the top are those with heavier though companies did not reduce aggregate
employment losses per unit of output loss. production. For this reason, these recessions
For example, in the recession that are on top in the table.
started in July 1953, the total loss of All postwar recessions clearly fall into
output was 2.22 percent. Judging by the two groups, separated by the bold line in
output loss alone, this recession was the table. For one group (call them heavy-
milder than the one listed right next to job-loss recessions) the ratio of employment
it in the table (July 1981) with a total loss to output loss exceeds 3, while for the
output loss of 3.18 percent. But if we other group (milder-job-loss recessions) the
look at the loss of employment, these two ratio is below 2.
recessions look very similar, with 3.66 The recessions in the first group are
percent of employment lost in 1953 and clearly much tougher on workers than
3.75 percent in 1981. Looking at output those in the second group. All three modern
and employment in combination, the 1953 recessions (1990, 2001, and 2007) are in the
recession was worse for workers than the heavy-job-loss group, above the bold line in
1981 recession because for every percentage the table.
point of output lost, the economy lost Some of the earlier recessions are also in
1.64 percentage points of employment the heavy-job-loss group, indicating that
in 1953 but only 1.18 percentage they were similarly tough on workers. But
points in 1981. This is what the ratio of no modern recession falls into the milder-
employment loss to GDP loss reflects. job-loss group. This suggests a shift in the
A special note on negative ratio values: U.S. economy. The U.S. economy used to
There are two recessions in postwar exhibit a mix of recessions—some with
U.S. history—one starting in December heavy job losses, and some with milder
1969 and the other in March 2001—in ones. But since the late-1980s, only the
which output did not fall overall. (For heavy-job-loss recessions remain.

36 The Changing Nature of Recessions

 End Notes

1
For a detailed exposition of this view of business cycles, see Zarnowitz (1985) as an example.
2
See Kydland and Prescott (1982) and Long and Plosser (1983).
3
For discussion of the role of fiscal policy in business cycles, see Christiano and Eichenbaum (1992) and Ramey
and Shapiro (1998). For a classic description of monetary policy as driver of economic fluctuations, see Friedman
(1958, 1961, 1968) and Friedman and Schwartz (1963). For more recent evidence on the role of policy in
business cycles, see Romer (1999).
4
See Murray, What Will Recession Mean to You?. For further information and the latest thinking on business cycles
and recessions, AIER’s monthly reports are a good source.
5
See Hall, “How Much Do We Understand About the Modern Recessions?” on understanding modern recessions.
6
MBO Partners, The State of Independence in America: Third Annual Independent Workforce Report, p. 13.
http://www.mbopartners.com/state-of-independence/independent-workforce-index.html.
7
For more information on developing transferable knowledge, skills, and abilities, as well as which skills will be
most in demand over the next several years, see Carnavale, Smith, and Strohl, Recovery: Job Growth and Education
Requirements Through 2020. http://cew.georgetown.edu/recovery2020.
8
Coombs, “Jobs Blog: When Demand Is Low, It’s Time to Train.”
http://www.shrm.org/hrdisciplines/staffingmanagement/articles/pages/whenlowdemandtimetotrain.aspx.
9
Kreisberg, “New Careers for Older Workers.”
10
AIER Research Staff, How to Avoid Financial Tangles., p. 125.
11
American Institute for Economic Research. 2006. Sensible Budgeting with the Rubber Budget Account Book,
Economic Education Bulletin, Vol. XLVI, No. 11, (November). Mass.: American Institute for Economic Research.
12
AIER Research Staff, p.126.
13
Pratt, How to Invest Wisely: Managing Assets for the Long Term.
14
Spreitzer and Porath, “Creating Sustainable Performance.”
15
For more on the benefits of investing in low-wage employees, see the Hitachi Foundation Pioneer Employers
Initiative website,
http://www.hitachifoundation.org/component/content/article/26-pioneer-employers/498-pioneer-employers.
16
Bloom et al., Management Practice & Productivity: Why they matter.
17
Gulati, Nohria, and Wohlgezogen, “Roaring Out of Recession.”
18
Von Hippel, Ogawa, and De Jong, “The Age of the Consumer-Innovator.”
19
Bhide (2008), The Venturesome Economy.
20
Bhide, p. 75.
21
IBM Institute for Business Value, The Customer-activated Enterprise.
22
For more on this theme, see HBR Insight Center, “Creating a Customer-Centered Organization.”
http://hbr.org/special-collections/insight/customers. Also of interest is the work of Harvard Business School
Professor Ranjay Gulati on customer centricity. In this short video interview, Professor Gulati makes the
case for reorienting a company around the customer: “Creating a Customer-Centric Business,”
http://blogs.hbr.org/2010/01/creating-a-customercentric-bus/

American Institute for Economic Research 37

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