Recessions, often defined as two or more quarters of negative economic growth, are a recurring feature of market economies.1 Increases in the unemployment rate go hand in hand with recessions, although the effects on the aggregate economy are commonly thought to be temporary. Since at least 1950, U.S. business cycle downturns have been followed by a steady recovery of the unemployment rate.2
Despite a body of evidence showing that a national recovery will occur over time, less literature has focused on the long-term effects of recessions on certain localities. Some recent research shows that people living in local areas that were heavily impacted by the Great Recession experienced enduring declines in labor market indicators.3 As recessions are known to affect individual labor markets differently, a logical next question is, can U.S. recessions lead to persistent effects on labor market outcomes in particular locations?
In their paper, “The Evolution of Local Labor Markets After Recessions,” Brad Hershbein of the W.E. Upjohn Institute for Employment Research and Bryan Stuart of the Philadelphia Fed study the impact of five U.S. recessions, from 1973 to 2009, on local labor markets hit severely by an economic downturn. The authors argue that understanding these recessions’ impacts on local economies has “broad implications for our understanding of labor markets, economic opportunities available to workers and their children, and appropriate policy responses.”
The authors examine recessions that occurred in 1973–1975, 1980–1982,4 1990–1991, 2001, and 2007–2009. Using regression models, they test the relationship between local economic activity during recessionary periods and sudden employment changes in metropolitan areas and commuting zones. Specifically, they identify geographical areas that had the greatest employment losses and compare them to areas with fewer employment losses.5 Also, they study the effect of recessions on local-area populations and earnings.
They find that communities that lost more jobs during recessions, such as Detroit and Chicago, had persistent declines in employment relative to communities that lost fewer jobs. Specifically, in the five recessions between 1973 and 2009, a 10 percent reduction in metropolitan-area employment during a recession was associated with, on average, a 12 percent decrease in employment seven to nine years after the low point or “trough” of the recession.
The authors also show that local areas with larger losses in employment experienced population declines during recessions, and those relative population declines continued to grow for several years after a recession’s trough. The population losses were, however, found to be smaller than the employment losses. The limited response by labor market participants to secure jobs elsewhere meant persistently lower employment-to-population ratios — in other words, a lower percentage of working-age people who were employed. The authors find that a 10 percent decline in employment during a recession was, on average, associated with a 6.6 percent decrease in the employment-to-population ratio. Further, the authors find that local-area employment losses during recessions led to persistent declines in per capita earnings.
Local employment losses were widespread across economic sectors, the authors find, with manufacturing and construction disproportionately affected. Moreover, declines in earnings disproportionally affected individuals at the middle and bottom of the earnings distribution. Among those who kept their jobs during a recession, three-quarters of the decline in annual earnings over the medium term occurred because of a reduction in hourly wages. This finding is consistent with previous research showing that, as a consequence of recessions, larger employment declines occur among lower-earning demographic groups.6
Also consistent with earlier studies, the authors find that the decreases in local employment-to-population ratios and earnings appear to stem mainly from the lasting impacts on individuals that remained in their local areas. (The authors find that both in-migration and out-migration declined following recession-induced employment losses.)
In summary, as Hershbein and Stuart explain, “post-recession changes in local labor market outcomes are remarkably similar over the past five decades, which underscores the extent to which persistent local labor market disruption is a general feature of the U.S. economy.” They add that these persistent labor market disruptions limit opportunities for workers and their children in the affected localities. To strengthen economic activity in these communities, the authors recommend investing in job creation and skill development. Further, they argue that although policy responses to recessions are typically focused on the short term, their results suggest that greater attention should be paid to recessions’ long-term consequences.
The views expressed in the paper are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
1 The National Bureau of Economic Research (NBER) is responsible for the official determination of a U.S. recession, which is based on quarterly GDP as well as monthly employment, personal income, and industrial production.
2 See, for example, Stéphane Dupraz, Emi Nakamura, and Jón Steinsson, “A Plucking Model of Business Cycles,” National Bureau of Economic Research Working Paper 26351 (2020); and Robert Hall and Marianna Kudlyak, “Why Has the US Economy Recovered So Consistently from Every Recession in the Past 70 Years?” National Bureau of Economic Research Working Paper 27234 (2020).