It May Not Be As Easy To Adjust To Economic Shocks As Previously Thought

April 20, 2016

Economic shocks like mass layoffs and recessions have, in the past, been viewed similarly to a shock you may get from someone who just rubbed their feet on the shag carpet and then touched your arm; there is an initial jolt that is both surprising and a little painful, but it quickly fades and just a few seconds later you are left with nothing but a faint tingle. When it comes to the economy, these economic shocks would cause problems in the near-term, but were followed by a relatively benign ‘adjustment’ period over the medium-term, according to During this time workers and local economies would adjust as the workers would leave distressed areas and move to healthier ones. As this happens, the jobless rates revert to the mean.

However, new research suggests this benign adjustment period may not be so benign after all. For example, during the Great Recession, worker out-migration was not a big part of the recovery process, meaning workers weren’t leaving the hardest hit areas and moving to healthier ones. Instead, because of the housing crisis impeding mobility, many of these laid off workers settled into non-participation in the workforce, contributing to 67 percent of the net labor force change that started with mass layoffs.

In addition, whole regions are having difficulty adjusting after the recession. Even nine years later, some metro areas are still severely affected by the events of the Great Recession. It is projected that employment rates across the country will not return to normal levels until the 2020s. With the general consensus being that recovery happens relatively quickly and automatically, there are not many policies in place to help accelerate the adjustment period.

As Mark Muro writes, the United States needs broader safety net and transition programs to retain displaced or vulnerable workers for jobs in expanding industries. While there is an adjustment process that happens automatically, it is much slower and tougher than originally thought.

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