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Countercyclical Restructuring and Jobless Recoveries

  • David Berger

    (Yale University)

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    In the past three recessions, two major features of the business cycle have changed. First, employment now lags output growth, leading to jobless recoveries. Second, average labor productivity (ALP) has become acyclical or even countercyclical. This paper proposes a joint explanation for both facts. I develop a quantitative model in which firms streamline and restructure during recessions. The model captures the idea that firms grow "fat" during booms but then quickly "restructure" during recessions by laying off their unproductive workers. Firms then enter the recovery with a greater ability to meet expanding demand without hiring additional workers. This model explains 55% of the decline in the procyclicality of ALP observed in the data and generates a 4 quarters long jobless recovery after the Great Recession.

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    File URL: https://economicdynamics.org/meetpapers/2012/paper_1179.pdf
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    Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1179.

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    Date of creation: 2012
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    Handle: RePEc:red:sed012:1179
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    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/
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