Understanding the Jobless Recoveries After 1991 and 2001

The jobless recoveries in the aftermath of the 1991 and 2001 recessions have puzzled many. Most explanations have focused on structural change. In this paper, I investigate the quantitative contribution of a cyclical mechanism towards generating jobless recoveries. Extending the model by Hansen and Sargent (1988), I calibrate and compute a dynamic stochastic general equilibrium model of heterogeneous establishments that use two margins of labor services: an intensive margin, hours per worker, and an extensive margin, employment. When facing adjustment costs to the latter, aggregate employment at the end of a short and shallow recession is still relatively high and the need for new hires is weak. Moreover, establishments increase average hours per worker in the early phase of a weak recovery, before they start hiring anew later on. This pattern is consistent with U.S. data. I find that this mechanism can explain approximately half of the differential behavior of aggregate employment in the recoveries following the 1991 and 2001 recessions, compared to previous ones. JEL Codes: E10, E24, E30, E32.