JOBLESS RECOVERIES: STAGNATION OR STRUCTURAL CHANGE?

Abstract

Within the existing literature a number of competing explanations for jobless recoveries have emerged. On the one hand there is evidence of dynamic structural change including offshoring/globalization and technological advances that are resulting in the loss of middle‐skill (routine) employment. Other studies emphasize a less dynamic economy with slower growth, reduced labor market fluidity, a decline in startup activity, and even economic stagnation. This study exploits variation among U.S. states to assess the degree that stagnation and/or important structural changes in the economy contribute to the recent phenomenon of jobless recoveries. We find support for both the stagnation and structural change theories of jobless recoveries. On the stagnation side, we find evidence that lower startup rates are a significant predictor of jobless recoveries. We also find evidence that links dynamic structural change to the jobless recovery phenomenon. More specifically states experiencing a long‐run downward trend in the share of routine employment are more likely to experience a jobless recovery. Our results are consistent with the polarization theory where routine‐replacing technological advances permanently reduce demand for middle‐skill labor, thus contributing to jobless recoveries. (JEL E32, E24)