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Upjohn Institute working paper ; 20-325
This paper studies the effects of each U.S. recession since 1973 on local labor markets. We find that recession-induced declines in employment are permanent, suggesting that local areas experience permanent declines in labor demand relative to less-affected areas. Population also falls, primarily due to reduced in-migration, but by less than employment. As a result, recessions generate long-lasting hysteresis: persistent decreases in the employment-to-population ratio and earnings per capita. Changes in the composition of workers explain less than half of local hysteresis. We further show that finite sample bias in vector autoregressions leads to artificial convergence, which can explain why some previous work finds no evidence of hysteresis in employment rates.
April 2020, Revised August 2021
Upjohn project #35305
We gratefully acknowledge funding from the 2018–2019 DOL Scholars Program (Contract # DOL-OPS-15-C-0060).
LABOR MARKET ISSUES; Job security and unemployment dynamics
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Hershbein, Brad J. and Bryan A. Stuart. 2020. "Recessions and Local Labor Market Hysteresis." Upjohn Institute Working Paper 20-325. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. https://doi.org/10.17848/wp20-325