The latest edition of the Federal Reserve Bank of New York's Current Issues in Economics and Finance, Has Structural Change Contributed to a Jobless Recovery?, is available.

This new study argues that the failure of employment to rebound during the current recovery may reflect an unusually high concentration of structural changes resulting in permanent shifts in the distribution of workers throughout the economy.

Authors Erica Groshen and Simon Potter find that permanent job losses predominated over temporary layoffs during the 2001 recession and that in most industries job losses are continuing, not being reversed, during the recovery. For employers, the creation of new jobs takes longer than recalling workers to their old positions and--at a time of economic uncertainty and financial market weakness--can pose significant risks, according to the authors. Thus, the fact that most jobs added after the recession need to be new positions, not rehires, may explain why payroll numbers have yet to rise.

The study begins with the premise that all recoveries combine cyclical and structural adjustments. Cyclical adjustments, the authors say, are "reversible responses to lulls in demand": industries lay off workers during the recession and then rehire them when business activity picks up. With structural adjustments, by contrast, the losses are permanent: industries eliminate jobs, forcing workers to seek new employment in other industries and sectors.

Groshen and Potter offer two forms of evidence that the balance between structural and cyclical adjustments changed in the 2001 recession, with the result that structural changes became much more dominant than they had been in recessions before 1990. First, the authors track the contribution of temporary layoffs--an indicator of cyclical change--to total unemployment in the last six recessions. They show that in the four recessions before 1990, temporary layoffs helped drive the movements in the unemployment rate, rising sharply during the downturn and then dropping at the close, or trough, of the recession. In the 2001 recession, by contrast, temporary layoffs rose only slightly and contributed little to unemployment. Significantly, the reduced role of temporary layoffs was also evident in the 1990-91 recession--a downturn, like the 2001 recession, that was followed by a "jobless recovery."

Second, the authors chart the direction of job flows in the seventy major U.S. industries (those identified by two digits in the Standard Industrial Classification system) during the 2001 recession and one earlier downturn--the "double-dip" in economic activity in 1980 and 1981-82, here treated as a single recession. The authors classify an industry's job adjustments as cyclical if its job losses (or gains) during the recession were quickly reversed when the economy began to recover. Alternatively, if the outflow of jobs from (or the inflow of jobs to) the industry continued during the recovery, the authors conclude that the jobs were permanently relocated and accordingly classify the adjustments as structural. They then aggregate the adjustments made by individual industries to determine whether structural or cyclical changes predominated.

This exercise reveals that job flows were evenly divided between structural and cyclical changes in the 1980-82 recession, but were largely structural in the most recent recession. The trend that emerges in the 2001 recession, the authors note, is "one in which jobs are relocated from some industries to others, not reclaimed by the same industries that had lost them earlier."

When the authors tally the share of employment held by industries undergoing cyclical changes and compare it with the share held by industries undergoing structural changes, they find that in the downturns in the mid-1970s and early 1980s, half of employment was in industries affected structurally and half in industries affected cyclically. In the 2001 downturn, by contrast, fully 79 percent of employees worked in industries affected structurally.

Groshen and Potter offer three possible explanations for the increased role of structural change in the most recent recession. First, the structural decline observed in many industries might be a correction following a period of overexpansion. Second, more responsive monetary and fiscal policy may have reduced cyclical swings in employment, leaving structural change as the dominant form of change. Third, new management strategies may be encouraging a structural shift toward leaner staffing.

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