THE STASH SEPTEMBER 3, 2009
Back in May, I wrote about recent research unearthing the fact that a substantial portion of the unemployment rate is driven not by job losses, but by slowdowns in hiring--a most counterintuitive result. The magnitude of this effect is the subject of some disagreement, but it would be fair to say that, on average, about 50-75% of the changes in the unemployment rate are caused by changes in the willingness of businesses to create new jobs.
I, and others, have used this to suggest that during downturns the government should do more to get businesses hiring again. But upon closer inspection by Federal Reserve economist Regis Barnichon, it turns out that the picture painted above doesn't hold during recessions. Specifically, Barnichon finds that "violent episodes" of job losses are
responsible for almost all of the movements in unemployment during the first two quarters after unemployment reaches a low
So when the unemployment rate does turn, those initial movements are due primarily to job shedding. Barnichon says that it takes about a year after a turning point for the lack-of-hiring effect to regain its influence over the unemployment rate. Consider the conventional wisdom partially restored.