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Why Such a Slow Recovery?

MPRC Faculty Associate John Haltiwanger speaks about job creation and destruction, and what made the Great Recession unique

In an interview with the Federal Reserve Bank of Richmond, economist John Haltiwanger explained the importance of “microdata” on job creation and destruction in understanding the economic factors that made the Great Recession different from previous recessions. Every month, millions of jobs are created and destroyed as firms expand and contract, or as new companies enter the market and old companies go out of business. But in recent years, this volatility has been unusually low, which may help to explain the economy’s sluggish recovery from the recent recession.

In the US, job destruction usually occurs in less productive businesses, while job creation happens in more productive ones. The cycle of job destruction and creation can be seen as a “cleansing” process in which resources move away from less productive companies and toward more productive ones. When the economy is healthy, enough new positions are created that people who lose their jobs should be able to move fairly quickly to new positions with more productive companies. During a recession, more jobs are destroyed than created, which causes the unemployment rate to rise.

But the Great Recession that began in 2007 was atypical in that the rates of job creation plummeted unusually low and have been slow to recover. The recent increase in job postings has not been accompanied by a corresponding increase in new hires. Uncertainty about the future of the economy is causing companies to postpone making hiring decisions, even when they have empty positions available.

Dr. Haltiwanger hypothesizes that the slow recovery has to do with a decrease in volatility among young small businesses. Young businesses are generally the most volatile and the most likely to create new jobs, but that dynamic has slowed down over the past few years. Young small businesses were hit especially hard in the Great Recession, especially in areas with very large declines in housing prices, because many small businesses rely on housing for loan collateral. There are simply fewer young businesses than there once were. This decline is concerning because that is where the most innovation and job creation happens.

Dr. Haltiwanger is working to analyze more data in order to learn more about what factors might have caused the recent patterns in job creation and destruction, and why the economic recovery has been so slow.

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