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Cyclical asymmetry in the labor market : Slow but steady improvements versus sharp declines

Summary:
 Have you ever spent hours on the beach meticulously building the perfect sandcastle, only for a bully to waltz by and kick it down in an instant? A similar phenomenon occurs in the labor market, as even the shortest recessions can undo years of progress made during an expansion. The unemployment rate tends to fall only gradually during economic expansions but rise sharply during recessions. This mismatch of slow declines versus sharp spikes is known as “cyclical asymmetry.” This cyclical asymmetry of the unemployment rate derives in part from the fact that it takes much longer to create jobs than to destroy them. We can think of the labor market as a market for productive relationships between employers and employees. These relationships are a durable form of capital: They provide

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Have you ever spent hours on the beach meticulously building the perfect sandcastle, only for a bully to waltz by and kick it down in an instant? A similar phenomenon occurs in the labor market, as even the shortest recessions can undo years of progress made during an expansion. The unemployment rate tends to fall only gradually during economic expansions but rise sharply during recessions. This mismatch of slow declines versus sharp spikes is known as “cyclical asymmetry.”

This cyclical asymmetry of the unemployment rate derives in part from the fact that it takes much longer to create jobs than to destroy them. We can think of the labor market as a market for productive relationships between employers and employees. These relationships are a durable form of capital: They provide long-term economic benefits over time for firms and workers alike. It can take a while to build these relationships but only a short time to terminate them.

Consider the drawn-out process it takes to match employers and employees. First of all, both parties much search for and identify potential matches. Then, employers usually put candidates through a lengthy hiring process before making any offers. And even once the employee is hired, it takes time to establish a working relationship. Hence, job creation tends to be slow, even when the economy is performing well. The unemployment rate does not decline sharply when the economy is hit by a positive disturbance because relationships take time to develop.

Conversely, consider what happens when a recession hits. Letting workers go takes only an instant. In a flexible labor market, firms are often quick to lay off workers to save costs, often letting go workers who have been with the company for years. So, when the economy is hit by a negative disturbance, the unemployment rate tends to spike as firms lay off large numbers of workers.

Cyclical asymmetry also occurs in population dynamics in the form of the “heat wave effect.” Often, mortality rates rise and the population suddenly declines when bad weather hits. Yet, when a streak of good weather hits, we don’t see a corresponding boost in the population, as it takes time to repopulate after a tragedy strikes. In the context of the labor market, a recession is a “heat wave” that leads to sudden job losses and an expansion is a spell of good weather that, over time, creates jobs more steadily.

How this graph was created: Search for “civilian unemployment rate” and pick the seasonally adjusted series from the first result.

Suggested by David Andolfatto and Andrew Spewak.

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FRED Blog
The Federal Reserve Bank of St. Louis is the center of the Eighth District of the Federal Reserve System. This District includes Arkansas, eastern Missouri, southern Illinois and Indiana, western Kentucky and Tennessee, and northern Mississippi.

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