Exploring Why Does Employment Growth Always Lag Behind an Economic Growth After a Recession and Whether Firms Achieve Efficiency During a Recession?

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|Labor Economics Paper | | | |Exploring why does employment growth always lag behind an economic growth after a recession and whether firms | |achieve efficiency during a recession? | | | |12/7/2009 | | |

The downfall of the economy in the last couple of years has brought about high numbers of unemployment, the highest ever since the great depression. This has had some major impacts on how organizations have taken measures to either reduce the number of employees on their labor work force or reduce pay. However, the past couple quarters have seen the positive signals of the economy, perhaps suggesting that the recession might be over. Nonetheless, this hasn’t reduced the unemployment rates as expected; instead, it has increased the amount of unemployment. The percentage is expected to increase through 2010, even though the unemployment rates have decreased from 10.2% in October to 10% in November. The article I am analyzing, Article 1[1], acknowledges the high unemployment rates despite the recovering economy and firms trying to hire an efficient quantity of labor to reduce costs. Therefore this paper will address the issue of why unemployment rates tend to rise into an economic recovery, and does hiring always lag behind an economic recovery. Furthermore, the issue of whether a firm achieves efficiency through higher productivity rates by reducing their workforce or/and decreasing the number of hours worked for the wages they provide along. Another question that will be addressed is whether firms have higher allocative efficiencies during a recession.

The main question that needs to be addressed here is why hiring always lag behind economic recovery. According to Article 2[2],"History tells us that job growth always lags behind economic growth," said Mr. Obama, after the November unemployment rates were released. First let’s consider the added worker effect on the lag of hiring with an economic recovery. According to the added worker effect, the sole/primary wage earner in the family is laid off, as a result causing other family members to look for temporary jobs. Hence, when these members enter the work force, they are a major contributor to the unemployment rate as they are looking for jobs and as a result increase the labor force participation rates. As a result the labor force becomes larger, and unemployment rates increase in the labor force, as more people are now unemployed and are looking for jobs in the labor force.

According to the Stock-flow model of unemployment, we know that if the rate of inflow to the unemployment category, by the way of layoffs increased and all other flows remained constant, keeping the size of the labor force constant, the unemployment rates tend to increase. At the end of a recession or during economic recovery, what causes a lack of increase in employment rates or a decrease unemployment rates is a mystery. At the start of a recession, many unemployed people who are looking for jobs and fail at finding a job, lose hope and quit looking for jobs- this is the discouraged worker effect. On the contrary, as the economy starts stabilizing again, the discouraged workers, who left the labor force earlier, make attempts to rejoin the market by actively seeking out a job. An economic recovery also causes non-earning members to seek jobs, after a recession...
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