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Capacity Utilization and Unemployment

Mark Thoma:

Economist's View: Capacity Utilization and Unemployment: Why will the recovery of employment take even longer than the recovery of output?... First, firms do not want to make a commitment to hiring new workers until they are sure the recovery is solid, and uncertainty about the strength of the recovery near turning points leads firms to delay in hiring new workers. Second, during a downturn it's natural to reorganize production... install labor saving equipment in an attempt to cut costs.... The third reason for a delay is that firms... will not hire new workers until this excess capacity is used up.... Fourth, when there is a considerable amount of structural change – leading to large numbers of workers who must be retrained and/or relocated as they move out of industries such as housing and finance – labor markets will have difficulty recovering.

I hope I am wrong, but I believe these factors will interact to produce an extended period of unemployment. Historically, financial meltdowns of the type we experienced are difficult to recover from and this creates considerable uncertainty. Thus, the first factor listed above is particularly strong....

What about the longer run? Will the troubles for labor end when the recession is over? Unfortunately, the answer is no.  Labor markets have experienced tumultuous change in recent decades due to globalization and technological change, and these forces will still be there after the recession ends.