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Essays on Jobless Recovery Essays on Jobless Recovery A Thesis Submitted to the Faculty of Drexel University by James Patrick DeNicco in partial fulfillment of the requirements for the degree of Doctor of Philosophy June 2013 ii c Copyright 2013 James P. DeNicco. All Rights Reserved. iii Acknowledgments I would like to give a special thanks to my committee members, Dr. Christopher Laincz, Dr. Maria Olivero, Dr. Mark Stehr, Dr. Bang Jeon and Dr. Scott Dressler. I would also like to extend a thank you to the rest of the Drexel University Economics Department. All of you have been instrumental in this process from giving me ad- vice and guidance to being willing to sit through so many of my presentations with thoughtful attentiveness. Throughout my time here, I never felt like I was without help. I would be remiss if I did not single out the efforts of my advisor, Dr. Christopher Laincz. He was always willing to sit and talk with me about my work, as well as read and re-read my papers countless times with red pen at the ready. He made me and my work so much better than it would have otherwise been. I really do appreciate all you have done for me. It was a pleasure and honor going through this process with all of the before mentioned people. Drexel University's Economics Department is second to none in my opinion. It is the people that make it so. I would also like to thank my family, especially my wife Mary, for the patience I was shown throughout this process. They were supportive from start to finish. With- out that support this would never have been possible. I thank you all! iv Table of Contents List of Tables ................................... vi List of Figures .................................. vii Abstract ...................................... viii 1 Jobless Recovery in the United States . 10 1.1 Introduction . 10 1.2 US Data: Preliminary Analysis . 14 1.3 Analysis . 16 1.4 Robustness . 23 1.5 Forecasting . 25 1.6 Inflows to Unemployment . 27 1.7 Discussion . 28 1.8 Conclusions . 36 2 The Cost of Firing and the Speed of Hiring . 38 2.1 Introduction . 38 2.2 Background . 40 2.3 Literature Review . 43 2.4 The Model . 47 2.4.1 Households . 47 2.4.2 Representative Family Problem . 50 2.4.3 Firms . 51 2.5 STEADY STATE . 55 2.5.1 Parameters . 55 2.5.2 Equilibrium . 56 2.6 Impulse Response Functions . 58 2.7 Conclusions . 61 3 Employment-At-Will Exceptions and Jobless Recovery . 62 3.1 Introduction . 62 3.2 Literature Review . 65 3.3 Employment-at-Will Background . 68 3.4 Data . 70 3.5 Results and Analysis . 71 3.5.1 Single Variable Autocorrelation Regressions . 72 3.5.2 Panel VARs in Split Samples . 80 3.6 Robustness Tests . 83 3.7 Conclusions . 85 v List of References ................................ 88 Appendix A Chapter Two Steady State . 92 Appendix B Chapter Three Case Law ................... 94 Appendix C Tables ............................... 97 Appendix D Figures .............................. 114 vi List of Tables 1 Historical Summary of U.S. Recoveries from Recessionary Periods . 97 2 Unit Root Tests: Null Hypothesis for a Unit Root . 98 3 OLS VARs for Outflows Subsample. 99 4 OLS VARs for Expansion Subsample. 100 5 Robustness Test 1: OLS VARs for Outflows Subsample. 101 6 Robustness Test 2: OLS VARs for Outflows Subsample. 102 7 Forecast Model (Outflows: UR as Dependent Variable) . 102 8 Percent Industry Composition: Bureau of Labor and Statistics . 103 9 Average Index Scores and Unemployment Rates from 1990 to 2010 . 104 10 Average Changes in Unemployment Rates and State-Weighted GDP Growth, Conditional on the Presence of EWEs: Outflows and Expan- sion Periods. 105 11 Average Changes in Unemployment Rates and State-Weighted GDP Growth, Conditional on the Presence of EWEs: Inflows and Contrac- tion Periods. 105 12 Panel unit root tests: Summary For Differences in Unemployment Rates and State Personal Income-Weighted GDP, includes individual effects and a linear trend. 106 13 Single Variables Analysis with Interaction Terms. 107 14 Single Variable Analysis with Outflows and Expansion Subsamples. 108 15 Single Variable Analysis with Inflows and Contraction Subsamples. 109 16 OLS Panel VAR with Fixed State and Time Effects for Outflows and Expansion Subsamples. 110 17 OLS Panel VAR with Fixed State and Time Effects for Inflows and Contraction Subsamples. 111 18 OLS Panel VAR with Fixed State and Time Effects for Outflows and Expansion Subsamples with Union Density. 112 19 Outflows: OLS Panel VAR with Fixed State and Time Effects and a Lagged Implementation Effect . 113 vii List of Figures 1 US Unemployment (1948-2012)- BLS . 114 2 Out of Sample Forecast Results for Recovery from the 2001 Recession 115 3 Forecast Results from 2012 . 116 4 Forecast Results from 2012 . 117 5 JOLTS: Job Openings and Labor Turnover Survey (2001-2012) - BLS 118 6 Montly Participation Rate from (1948-2012) - BLS . 119 7 Median Usual Weekly Earnings of Full-Time Wage and Salary workers -BLS ................................... 120 8 Industry Unemployment Rates: BLS . 121 9 Impulse Response Functions for Effort and Wages . 122 10 Impulse Response Functions for Consumption Types . 123 11 Impulse Response Functions for Labor and Capital . 124 12 Recovery of Unemployment Rate Following a Negative Productivity Shock ................................... 125 13 Percent Deviations From Steady State . 126 viii Abstract Essays on Jobless Recovery James P. DeNicco In this dissertation I focus on the topic of jobless recovery, which ex- plores the speed of recovery in unemployment rates post-recession, con- trolling for GDP growth. Chapter one furthers the empirical studies on the time series properties of the United States unemployment rate. Using vector auto regression models and controlling for changes in GDP, the un- employment rate and changes in the unemployment rate, I find structural breaks in 1959 and 1984 indicating that following a recession, the rate of decrease in the unemployment rate significantly slowed over time. Chapter one substantiates the phenomenon of jobless recovery in the United States and uses the timing of the structural breaks to review the possible causes and related theory, including industry composition, participation rates, entitlements and labor laws. Chapter two uses a representative, forward looking firm in capital and labor decisions to introduce separation costs into a discrete, dynamic, efficiency wage model in order to determine the effect of separation costs on both steady state unemployment rates and the hiring process following a negative productivity shock. I find higher separation costs cause higher steady states rates of unemployment and sclerosis of labor dynamics both in separations and hires following a re- cession. These findings provide a better understanding of the dynamics of post recession unemployment rates and show how firing costs may con- tribute to jobless recovery. In Chapter three, I study the effects on jobless recovery of diminishing the power of an employer to fire an employee through Employment-At-Will Exceptions (EWEs). I do so by using a dynamic panel with quarterly data ranging from 1976 to 2010 for the 50 ix states in the United States. I test both changes in state unemployment rates and state-weighted GDP growth in single variable regressions and VAR regressions. My contribution to the literature is threefold. First, I show two of the three EWEs contribute significantly to jobless recovery in the U.S. Second, I lend support to the predictions of theory that increased firing costs decrease the rate of hiring during recoveries. Third, I resolve differences in the various sources documenting the three types of EWEs in different states. 10 Chapter 1: Jobless Recovery in the United States This chapter furthers the empirical studies on the time series properties of the United States unemployment rate. Using vector auto regression models and controlling for log differences in GDP, the unemployment rate and changes in the unemployment rate, we show that following a recession, the rate of decrease in the unemployment rate sig- nificantly slowed over time. We split our data sample to isolate the recovery portion of the unemployment cycle and find two structural breaks. Specifically the coefficients on the two structural breaks are positive and successively larger, which means controlling for GDP growth rates we are seeing weaker recovery in the unemployment rate , i.e. recoveries that are increasingly \jobless." The first break is in 1959, and the second is in 1984 coinciding with the usual timing of the \Great Moderation." Using the 7.85 percent unemployment rate at the end of 2012, recovery back to historical long run averages of 5.5 percent unemployment rates after the first structural break will take at least four additional quarters of 2.0 percent GDP growth. After the second structural break it will take at least another four additional quarters of the same growth to get back to the same unemployment rate. This chapter substantiates the phenomenon of jobless recovery in the United States and uses the timing of the structural breaks to review the possible causes and related theory, including industry composition, partic- ipation rates, entitlements and labor laws. 1.1 Introduction The phrase \jobless recovery" became popular in the United States back in the 2000 recession, when it took seven straight quarters of GDP growth to result in decreases of the unemployment rate. With the 2008 recession, the phrase found new life in the beginning stages of recovery. The term is actually first found in print in The New York Times during the depression era of the 1930's when the United States was experiencing its worst labor environment in history.1 The unemployment rate peaked just below twenty-five percent and took a decade to return to pre-depression levels.
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