Editors' Summary

The Brookings Panel on Economic Activity held its eighty-ninth conference in Washington, D.C., on March 18 and 19, 2010. The recent financial crisis and ensuing recession continue to dominate the minds of leading economists, and this conference was no exception. Three of the papers in this volume assess macroeconomic developments in light of these remarkable events, examining the downturn in the U.S. labor market, the vulnerability of the financial system, and the spread of the crisis to emerging market countries. In each case the authors illustrate how economic institutions mediated the consequences of the macroeconomic shocks. A fourth paper, which addresses how best to measure GDP, is also highly relevant, showing that an alternative to the most commonly used measure would have yielded a clearer early warning of the size and scope of the U.S. downturn. The two remaining papers compile interesting new data that speak to ongoing longer-term debates about the balance between work and family and about health care reform.

In the first paper in this issue, Michael Elsby, Bart Hobijn, and Ayşegül Şahin provide a heroic real-time analysis of recent labor market outcomes, comparing the recession that began in late 2007 with earlier downturns. All major measures of labor market conditions—including changes in unemployment, employment, participation, and hours—indicate that this most recent recession has been more severe than any since the Great Depression. The impact of the recession has been widespread, as unemployment rates among most major socioeconomic groups have exceeded previous postwar peaks.

Yet this recession also mirrors previous downturns in many respects. As in those recessions, the total decline in labor input is about one-third due to a shorter workweek and two-thirds due to fewer people working. Labor force participation has fallen, muting the impact of this decline on the unemployment rate. And the sharpest impacts of this recession also follow the pattern observed in earlier downturns, with men suffering more than women, the young more than the old, and the less educated and racial minorities bearing disproportionate impacts.

The authors then turn to examining inflows and outflows from unemployment. They find that inflows into unemployment rose sharply, particularly in the early stages of the recession, and that the subsequent rise in unemployment largely reflects a rise in the duration of unemployment spells. Yet the rate at which workers separate from jobs has not risen—a fact that suggests a change in the composition of separations toward fewer quits (which often involve job-to-job flows) and more layoffs. The important role of layoffs early in this recession represents a departure from recent downturns, but it parallels earlier severe recessions. Outflows from unemployment (the flip side of the rise in duration of the typical unemployment spell) have been strikingly similar across demographic groups, and hence demographic differences in the impact of this recession—as in previous downturns—are largely driven by the different rates at which members of each group typically enter unemployment.

Looking forward, Elsby, Hobijn, and Şahin note that the rise in inflows to unemployment has abated, and that the rate at which workers are exiting unemployment has fallen further than in previous recessions. Consequently, the key to subsequent recovery will be further rises in the unemployment exit rate. Indeed, perhaps the most distinctive feature of this recession is the recent record low in the exit rate, which is also reflected in current record rates of long-term unemployment. Unfortunately, recent job vacancy data suggest that the Beveridge curve, which relates unemployment and vacancies, has shifted outward, perhaps because of a decline in the efficiency with which job seekers are being matched with available jobs. In turn, outflows from unemployment are lower than might be expected on the basis of the vacancy-unemployment ratio, which, the authors argue, may be partly (but only partly) due to the temporary extension of unemployment insurance for the long-term unemployed. Because the long-term unemployed tend to exit unemployment only very slowly, outflows from unemployment may remain depressed for some time, dampening the recovery. Even so, the authors note that the emerging long-term unemployment problem in the United...