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University of Arkansas, Fayetteville ScholarWorks@UARK Theses and Dissertations 5-2014 Essays on the Changing Nature of Business Cycle Fluctuations: A State-Level Study of Jobless Recoveries and the Great Moderation Jared David Reber University of Arkansas, Fayetteville Follow this and additional works at: http://scholarworks.uark.edu/etd Part of the Macroeconomics Commons Recommended Citation Reber, Jared David, "Essays on the Changing Nature of Business Cycle Fluctuations: A State-Level Study of Jobless Recoveries and the Great Moderation" (2014). Theses and Dissertations. 2291. http://scholarworks.uark.edu/etd/2291 This Dissertation is brought to you for free and open access by ScholarWorks@UARK. It has been accepted for inclusion in Theses and Dissertations by an authorized administrator of ScholarWorks@UARK. For more information, please contact scholar@uark.edu, ccmiddle@uark.edu. Essays on the Changing Nature of Business Cycle Fluctuations: A State-Level Study of Jobless Recoveries and the Great Moderation Essays on the Changing Nature of Business Cycle Fluctuations: A State-Level Study of Jobless Recoveries and the Great Moderation A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Economics by Jared D. Reber University of Arkansas Bachelor of Arts in Economics, 2010 University of Arkansas Master of Arts in Economics, 2011 May 2014 University of Arkansas This dissertation is approved for recommendation to the Graduate Council. ————————————————————– ————————————————————– Dr. Fabio Mendez Dr. Jingping Gu Dissertation Co-Director Dissertation Co-Director ————————————————————– Dr. Andrea Civelli Committee Member Abstract The behavior of several important macroeconomic variables has changed dramatically over the past several business cycles in the U.S. These changes, which began around the mid1980s, have been viewed as somewhat puzzling given the stark contrast they exhibit to earlier post-war data. The movement of output and employment has historically been highly correlated throughout the different phases of the business cycle. However, this changed with the economic recovery of 1991. Since then, periods of output recovery have been accompanied by periods of prolonged job loss. These periods have come to be known as “jobless recoveries”. Several competing explanations for this phenomenon have come forth, however, all face similar limitations. To date, there has been no method presented to quantify a period of jobless recovery. This makes comparisons across business cycles difficult and also prevents formal statistical testing of the proposed explanations. This study creates a meaningful measure of a jobless recovery which can be used to test these hypotheses. Furthermore, jobless recoveries have only been studied using the national aggregate data. This neglects potentially valuable information which may exist in the cross-section between states. Using the jobless recovery measure, a state-level empirical analysis is conducted to determine which, if any, of the existing explanations of jobless recoveries are supported by the data. It has also been noted that the growth of output has experienced dramatic changes over roughly the same period. The broad decline in the volatility of output since the mid1980s, named the Great Moderation, has become the subject of a large literature. However, the literature has examined mostly data at the national-level. Using a proxy of quarterly output, this paper provides state-level evidence of the Great Moderation and shows that large, cross-state differences exist in the degree to which each state experiences the Great Moderation. Explanations for why the Great Moderation exists in the national data are examined to see how well they explain the observed cross-state differences in the evolution of output volatility. Table of Contents 1 Introduction 1 2 Chapter 1 3 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2 Evidence of Jobless Recoveries at the National Level . . . . . . . . . . . . . . . . . . 9 2.3 Description of the Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.4 The Jobless Recovery Depth and Other Measures of Jobless Recoveries . . . . . . . . 17 2.5 Cross-sectional Properties of Jobless Recoveries . . . . . . . . . . . . . . . . . . . . . 34 2.6 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.7 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 3 Chapter 2 53 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 3.2 Survey of the Literature of Jobless Recoveries . . . . . . . . . . . . . . . . . . . . . . 56 3.3 State-Level Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 3.4 Data Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 3.5 Empirical Analysis and Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 3.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 3.7 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 4 Chapter 3 91 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 4.2 Literature on The Great Moderation . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 4.3 The Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 4.4 Empirical Analysis and Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 4.6 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 5 Conclusion 126 Introduction The three most recent U.S. business cycles have seen dramatic departures from earlier cycles with respect to the volatility and co-movements of several macroeconomic variables. Chief among these are the decline in volatility of aggregate output growth and the divergence of the growth rates of employment and output. Employment growth has historically followed GDP growth very closely, and the nature of the relationship between output and labor was thought to be well understood. However, in recent business cycles, employment growth has been negative for extended periods into the economic recovery. These jobless recoveries have puzzled economists and given birth to a literature which seeks to explain their emergence. To date, the work on jobless recoveries has been constrained in at least two significant ways. The first is the lack of a comprehensive measure capable of capturing the magnitude of a given jobless recovery. Such a measure is desirable in order to make comparisons across business cycles and across different economies. Without a comprehensive jobless recovery measure, one cannot perform the statistical analysis necessary to test the existing hypotheses on the causes of jobless recoveries. This first constraint is addressed in the first chapter of this dissertation. A comprehensive measure for a jobless period is developed and then constructed for the nation and the fifty individual states. The second factor which has limited previous work on jobless recoveries is the lack of crosssectional analysis. Past research has focused only on the national time-series data, which provides at best three instances of jobless recoveries in the post-war U.S. This limitation is the focus of the second chapter of this dissertation. A panel study is conducted using state-level data from 1960-2012. This provides fifty times the observations for each business cycle allowing for much more robust statistical results. The state-level data, along with the newly developed jobless recovery measure from chapter one, is used to test several of the existing hypotheses on the causes of jobless recoveries. Finally, chapter three of this dissertation addresses a similar problem in the literature surrounding the Great Moderation. The Great Moderation is the name given to the period 1 of significant decline in output volatility in the United States beginning around 1984. While many have examined the national time-series data, few have analyzed output volatility across economies. Chapter three conducts some empirical tests of the leading theories on the Great Moderation using all fifty states. Thus, each chapter of this dissertation examines some recent change in the movements of variables over the business cycle which is not well understood and uses the statistically richer, state-level data to examine the competing hypotheses. 2 Chapter 1: The Measurement and Nature of Jobless Recoveries in the U.S. Jared D. Reber Department of Economics University of Arkansas Dissertation Committee: Dr. Fabio Mendez (co-Chair); Dr. Jingping Gu (co-Chair); and Dr. Andrea Civelli Abstract In the average recovery prior to 1990 for the post-war U.S., positive growth in output was accompanied by positive growth in employment. However, in the three most recent business cycles, the positive growth rate of output following the cyclical trough has been accompanied by significant periods of continued job loss, causing economists to label these periods “jobless recoveries.” While a sizable literature on this topic has developed, testing of proposed hypotheses has been constrained by the lack of a meaningful way to measure the degree or severity of a jobless recovery. As a result, there is little, if any, formal statistical tests of these hypotheses. We construct a general measure of the magnitude of a jobless recovery which exhibits many desirable properties for answering questions regarding the nature of this recent phenomenon. In addition to the national data for the U.S., we also apply our measure to the individual states, creating a database that allows for cross-sectional study of the jobless recovery problem. 3 1 Introduction ”You take my life when you do take the means whereby I live” - The Merchant of Venice, William Shakespeare (1600) The issue of employment has long been one of the primary concerns of economics. The behavior of aggregate employment during the business cycle was believed to be quite well understood until recently. In the average recovery prior to 1990 for the post-war United States, positive growth in output was accompanied by positive growth in employment. However, in the three most recent recessions, the positive growth rate of output following the cyclical trough has been accompanied by significant periods of continued job loss, causing economists to label these periods “jobless recoveries” (Groshen and Potter, 2003; Schreft and Singh; 2003; Aaronson et al., 2004; Berger, 2012). As stated by Schreft and Singh, a recovery is considered to be jobless “if the growth rate of employment in a recovery is not positive,” and this definition is consistent throughout the literature. Thus, if the economy is experiencing a recovery in output, yet there is no positive growth in employment, then this recovery is classified as jobless. This recent phenomenon is somewhat puzzling considering the remarkably strong historical correlation between output and employment. Between 1960 and 1990, business-cycle expansions in the USA came together with almost simultaneous increases in employment. But sometime around the year 1990, this macroeconomic relationship changed, and in all of the economic recoveries observed after that date, output growth was accompanied by extended periods of continued job losses. In fact, the average correlation between quarterly changes in output and quarterly changes in employment observed during business cycle expansions decreased from a strong 0.522 before 1990 to a much weaker 0.076 after 1990.1 1 The correlation was calculated by comparing the first difference in the log-values of non-farm employment and GDP strictly during business cycle expansions as defined by the National Bureau of Economic Research (NBER). We calculated the correlation for each 4 These periods of positive output growth and negative (or zero) growth in employment are the subject of a recent literature that attempts to understand their emergence. Several alternative hypothesis exist about what may be causing the jobless recoveries. Berger (2012), for example, argues that the drop-off in union power experienced in the 1980’s has lead businesses to become more productive during recessions and necessitate less workers during expansions, thus creating a jobless recovery. Groshen and Potter (2003) and Garin et al. (2011) focus instead on the relocation of jobs across industries or regions. They argue that the recent jobless recoveries result from the relocation of employment from shrinking, unproductive sectors to expanding, productive ones which require less workers. Faberman (2008) and DeNicco and Laincz (2013), in turn, have shown that jobless recoveries can be traced back to the broad decline in the volatility of economic aggregates beginning in 1984 (known as the Great Moderation). Others like Koenders and Rogerson (2005) and Bachmann (2011) provide an explanation based on employer’s labor hoarding behavior and unusually long expansionary periods; while yet others like Aaronson et al. (2004b) consider the recent rise in health care costs as a potential cause. However, the joblessness of recent recoveries in the United States is an issue deserving a great deal more attention than it is currently receiving. Economists cannot take lightly the divergent trend between output and employment. The very foundations of macroeconomic policy hinge on the premise that policies which stimulate aggregate output growth will also add jobs to the economy. It is in The General Theory of Employment, Interest, and Money that Keynes remarks, ”To dig holes in the ground, paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services.” Politicians and economists alike have made careers out of the assumption that fiscal policy can simultaneously achieve these dual objectives. Yet the data seem to suggest an evolution of the relationship between these two variables over time, implying a diminished, or at least, increasingly delayed, impact of policy on the labor market. Research efforts aimed at better particular period using quarterly data and report the averages: 0.522 for the period covering 1960-1990, and 0.076 for the post 1990 years. Employment data comes from the Bureau of Labor Statistics, GDP data comes from the Bureau of Economic Analysis. 5