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According to the National Bureau of Economic Research​ (NBER), what has been dubbed the Great Recession officially began in December 2007 and ended in June 2009. During this​ recession, national output of goods and services fell from the second quarter of 2008 until the end of the recession in the second quarter of​ 2009, and then slowly began to increase. When the recession was officially declared as being​ over, the unemployment rate continued to​ rise, reaching 10 percent in October 2009 and remained close to that level until April 2010 when it slowly started to decline. During that​ 10-month period, the net loss in jobs in the U.S. economy was close to 1.4 million. What can explain how it is possible that output can rise while at the same time employment​ falls?

2 Answers

6 votes

Answer:

First of all, contrary to what classical economists believe, wages and prices are sticky. This refers to the fact that they can increase more easily than decrease, so it takes a while for wages and prices to reach a true equilibrium point after a recession. Many companies that struggled a lot during the recession refused to fire workers, it is virtually impossible to lower wages, so the only way to balance a firm's costs is by firing people. Those companies sacrificed profitability in order to retain employees, so after the recession was over, there were still more employed people than necessary. The real world never works like an economics book.

After the recession is over, the only way to reduce unemployment is through an increase in aggregate demand which generally needs a little kick-start by the government. Even though the government did actually increase spending, it takes time, it is not something that happens in one day.

Anther reason that can delay a reduction in unemployment is that people actually get more efficient and productive, which is actually very good. You have to remember that new technology increases productivity, and the last few years new technologies that improve productivity have been extremely abundant. E.g. automation is the reason why so many manufacturing jobs have been lost in America, and that is not bad, since productivity increases. It is sad for those that do not have the necessary skills or training, but it is good for the economy as a whole.

User Mayur Prajapati
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5 votes

Answer: An increase in labor productivity

Explanation: In a situation where the output of each worker increases, then there will be an increase in productivity, hence there may not be any need to employ any other person except otherwise. The Labour productivity may have been enhanced as a result of technology, incentives or increase in wages, good healthcare and other things which might of prompted the workers to do more.

User Modesta
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