During the recession of 2007 – 2009, the U.S. experienced a high level of unemployment (up to 10.0% at its peak). Despite the end of the recession and three subsequent quarters of growth, the unemployment level remained high for over a year afterwards (See Appendix A, Figure 1) (Laibson, 2010). The increase in production didn’t lead to a net decrease in the unemployment rate, due its components: a cyclical component caused by the recession and a structural component caused by changes across different industries in the economy (Rittenberg & Tregarthen, 2011).
Prior to the recession, most businesses in the U.S. focused on maximizing strong growth in new lines of business. Many were reticent to cut declining lines of business or switch from older technologies, even though it was the best time to do so (Seabright, 2010). As the recession started, businesses aggressively cut costs, adopted efficient new practices and technologies, and began to shutter declining lines of business. As this occurred, firms across those same industries surplused employees who were no longer needed – this was the structural contribution to unemployment. The decrease in investment in human capital caused by the recession was the cyclical component (Acemoglu, 2010). [continues]
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