You might think the Great Recession is long over. But nearly a decade on, its effects still linger, especially in certain areas of America. And if the current pace of recovery continues, these places may see employment depressed for years — adding up to a “lost decade” for some parts of the country.
In a newly revised paper posted online this week, Danny Yagan, an economist at the University of California at Berkeley, follows the trajectory of more than 2 million American workers to see how their employment fluctuated before, during and after the Great Recession. To make sure that these workers are comparable, he looks at employees of national chains, such as Starbucks and Walmart, who would have earned the same wages doing identical tasks in different parts of the country.
The paper finds evidence of a “great divergence” between some parts of the United States that were fairly resilient to the recession — like much of Montana, Arkansas, Oklahoma and Louisiana — and places that were not as resilient. Yagan calculates that workers who started the recession in hard-hit parts of the country, such as areas of Florida and Arizona, were 1.3 percent less likely to be employed in 2014, compared with workers who started the recession elsewhere.
In other words, workers who appeared mostly identical in 2007 — and, by virtue of having the same jobs, probably had similar levels of education — ended up in very different situations seven years later, depending on where they started the recession. The data suggest that it was the fortune, or misfortune, of where people lived in 2007 that had a large effect on whether they were employed in 2014. Hard-hit areas may have ended up depressing the employment prospects of people who lived there.
The map below, which is based on Yagan’s data, shows the parts of the United States that were most affected by job losses. Sun Belt states, such as Arizona, California and Florida, and Rust Belt states, such as Michigan and Ohio, were among the places where employment was hit the hardest.
The map is based on "commuting zones," which are groups of counties that coincide with local labor markets. (Where communities are artificially subdivided into counties, commuting zones basically add those areas back together.)
According to Yagan's data, eight of the 15 most severely impacted commuting zones are in Florida, including Sarasota, Cape Coral and Pensacola. Fredericksburg, Va.; Nantucket, Mass.; Lisbon, N.D.; Limon and Trinidad, Colo.; and Las Vegas also make that list. Other cities in the top 30 most severely impacted commuting zones include Reno, Nev.; Tampa; Fort Collins, Colo.; Macon, Ga.; and Sacramento.
The areas that Yagan's data show were hit least by recession-era employment shocks include commuting zones in Arkansas, South Carolina, West Virginia, New York, Maine, Illinois, Oklahoma, Oregon and more, including California's Bay Area; Helena, Mont.; El Paso; Wichita; and Shreveport, La.
Years after the Great Recession, the “great divergence” in employment prospects between different parts of the country is still going strong, the paper suggests. The hardest-hit places in America are recovering, but slowly. If you extend current trends into the future, then employment rates in the most and least affected parts of the United States will not converge until sometime in the 2020s, as the graph below shows.
If these projections turn out to be correct, the recession will have resulted in more than a decade of depressed employment in some areas.
Yagan’s paper provides a fascinating and useful snapshot of the crippling effect that the recession has had on parts of the United States. But what economists find most interesting about the work is what it may reveal about why this might have happened, and why certain areas are still struggling so much.
Before we can address that question head-on, it's important to know that America’s recovery from the recession is an unusual one. While the unemployment rate has recovered — it's now down to a low 4.7 percent — the employment rate has not.
America’s unemployment rate measures workers who don’t have jobs but are still actively seeking employment. The unemployment rate in parts of the country that Yagan finds were hit hard by the recession is now about the same as the unemployment rate in areas that weren’t hit so hard. But the employment rates — the percentage of adults who have jobs — are still much worse in the hard-hit places that Yagan measures than the better-off areas.
How can we explain the discrepancy? The reason is that many Americans are no longer counted among the unemployed because they have given up looking for work. Since the Great Recession, about 3 percent of American adults have just stopped looking for work altogether.
According to classical economic theory, this shouldn't be the case. Classical economics says that the movement of workers from place to place and the movement of wages in local markets should help employment rates recover after an economic shock. In general, the nation should heal altogether.
That it hasn't may be evidence of an idea in vogue among many prominent economists — that the economy could be somehow scarred by an event like the recession in a way that could make it weaker for a long time, or perhaps permanently. This theory, that the financial crisis may have irreparably damaged the economy, like a human body might be damaged by a disease, is called “hysteresis."
No one can prove hysteresis exists, but there are signs that it could be occurring, Yagan said. “People have stopped looking for work. The question is why,” he wrote in an e-mail.
By comparing the very different prospects of similar workers who faced different great recessions, his paper shows that lower employment didn't just result from general long-running trends that are affecting the American economy, like offshoring or the replacement of some workers with computers or robots. Instead, it adds evidence to the claim that it was the Great Recession itself that altered America's employment picture.
"We used to think business cycles were just that -- cycles. Cycles around a fixed long run trend," Lawrence H. Summers, an economist and the former Treasury secretary who wrote about hysteresis in 1986, said in emailed comments. "Now we know better -- that hysteresis effects whereby downturns affect potential future output are profoundly important. Yagan's work on labor markets provides further support for this important idea."
There are two main theories about how the Great Recession might have left this legacy, beyond it being a random occurrence. The first is that it somehow changed workers themselves. People who had unsuccessfully looked for jobs for a long time might have become discouraged, and decided to retire completely. Others who have been out of the job market for a while might have seen their job skills erode, making them unable to get a job in the future.
Another possibility is that the Great Recession damaged local economies, in ways that pushed them to a new, lower “normal.” It could be that local housing busts are especially hard for local economies to recover from, since declining home values make local people feel poorer and in turn decrease their demand for other things.
For example, someone who saw their house lose tens or hundreds of thousands of dollars in value because of the Great Recession might end up spending less at the local Starbucks and Walmart. Those businesses might in turn hire fewer people, giving other locals less to spend, and eroding the local economy. In other words, the one-time shock of the recession could have moved local economies to permanently weaker states, from which they won’t come back to normal on their own.
“Under hysteresis, either the recession scarred the people, or it scarred the area and people just haven’t moved out,” Yagan wrote. “It might’ve scarred the people by decaying their skills or taste for work, or scarred the area by moving it to a new normal, a new equilibrium. They’re both possibilities, or it could be a combination.”
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