Since the work of Burns and Mitchell (1946), economists who study business cycle fluctuations typically refer to the "business cycle facts" without need to referencea particular episode in a particular country. One of the accepted stylized facts of business cycle movements is that employment and output are strongly positively correlated, although employment lags output by about one quarter. The apparent slow growth of employment in the recoveries following the last two US recessions (i.e., the so-called "jobless recovery" phenomenon) runs counter to this stylized fact. This paper suggestsa possible explanation for this apparently anomalous behavior.
The two most recent recessions in the US share a common property: both followed unusually long expansions. Motivated by this observation we propose an economic mechanism that links the speed with which employment increases during the recovery fromarecessionto the length of the expansion preceding the recession. The mechanism stresses the manner in which organizations seek to eliminate unneeded labor and is easily described. We assume that inefficiencies regarding the use of labor emerge overtime within an organization.
Eliminating these inefficiencies (aprocesswerefer to as reorganizing) requires scarce organizational resources that must be diverted away from current production. This tradeoff generates opportunities forintertemporal substitution and we show that reorganization will be postponed to periods in which production is relatively low. It follows that after along expansion, many more organizations have postponed reorganization. Because reorganization leads to the shedding of unnecessary labor and takes time, this gives rise to an extended period in which the economy sheds labor, thereby delaying the date at which aggregate employment begins to increase during the recovery.
The first part of this paper presents one formulation of a model of organizations that generates these effects. The core model should be seen as an extension of the Lucas (1978) span of control model and the Hopenhayn (1992) industry equilibrium model to allow fora richer set of dynamics within an organization. Although we focus on the implications for business cycles, we believe this model may also prove useful for examining plant and firm level dynamics more generally. The model is purposefully simplifi ed in order to highlight the key economic tradeoffs, and the analysis focuses on the qualitative nature of the interactions. We leave the task of building a model suitable for quantitative analysis of the forces for future work.
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