Economist Nick Perna coined the phrase "jobless recovery" following the recession of 1990-1991 to describe a situation in which the economy recovered from a recession but the job market does not. In 1990, this phenomenon was a new development. In the decades following, with numerous fluctuations in the economic cycle, 1990 is now viewed as the beginning of the new normal.

The History and the Numbers
Prior to 1990, the unemployment that accompanied economic downturns began to reverse itself, shortly after the recessions reached their troughs as employers began to recall workers. The cycle was broken after the recession that took place from July 1990 to March 1991, as unemployment continued to rise even after the recession ended, and did not rebound to pre-recession levels until 1997.

Unemployment prior to and following the recession of July 1990-March 1991
Year Unemployment Rate
1989 5.3%
1990 5.6%
1991 6.8%
1992 7.5%
1993 6.9%
1994 6.1%
1995 5.6%
1996 5.4%
1997 4.9%

The new pattern continued in the aftermath of the recession that took place at the beginning of the new millennium, following the collapse of the dotcom bubble. Unemployment continued to rise following the end of the recession, and pre-recessionary employment levels were not revisited, even prior to the start of the next recession. Before the global financial industry experienced a meltdown in 2008, unemployment continued to fluctuate around the levels witnessed in the previous recession.

Unemployment prior to and following the recession of March 2001-November 2001
Year Unemployment Rate
2000 4.0%
2001 4.7%
2002 5.8%
2003 6.0%
2004 5.5%
2005 5.1%
2006 4.6%
Unemployment prior to and following the recession of December 2007-November 2010
Year Unemployment Rate
2006 4.6%
2007 4.6%
2008 5.8%
2009 9.3%
2010 +9.5%

Causes
Why did a cycle that held true for decades change? Why doesn't employment rebound following a recession? The experts cite a variety of causes, including structural changes in the economy and increased worker productivity. Globalization is one well-known factor, as jobs once based in the United States are sent overseas to lower-paying labor markets. (The Globalization Debate provides a closer look at thistopic.)

Executive compensation is another factor. Since the 1980s, executive pay has been increasingly linked to stock options. A high stock price is directly related to high personal profits for the CEO, so labor costs must be minimized to maximize profits and keep the price of the stock rising. (To learn more about executive compensation, see Reining In CEO Rewards and Lifting The Lid On CEO Compensation.)

It's simply a case whereby a minority of the population has strong financial incentive to act in their own best interests. In colloquial terms, those benefiting from the arrangement would say that it is capitalism at work, while the opposing view would say that the rich get richer at the expense of the middle class and the poor.

Consumer behavior also plays a role. Consumers want to spend as little as possible when they shop. By choosing to purchase less expensive imported goods rather than more expensive domestically produced goods, they minimize their expenses. Here again, there is a financial incentive to act in their own self interest. The down side of this behavior is that the money they spend creates jobs overseas and simultaneous unemployment at home. Although there is much debate regarding whether or not opening domestic borders to international exports reduces jobs, some economists justify a jobless recovery with the preceding logic. The significant presence of imported clothing, cars, steel and other items once produced domestically supports the argument with regard to a variety of formerly high-paying manufacturing jobs. In more recent years, the outsourcing of white-collar jobs from engineering and computer programming to journalism and radiology has also attracted significant attention.

Technology and increased productivity are also considerations. As companies demand greater productivity from workers and replace manual processes with machines, fewer employees are required to complete the necessary tasks. Jobs that once required an assembly line filled with workers are now done by automatic processing technologies. Manufacturing plants that once employed hundreds of workers now require only a few highly skilled technicians to monitor the process.

The nature of the recessions themselves is something else to consider. From 1969-1982, recessions typically occurred when the Federal Reserve raised interest rates to control inflation. In the more recent downturns, economic bubbles and other factors beyond the Fed's control contributed to the malaise.

When these factors are combined, white collar workers begin to experience what blue-collar workers in the steel and auto industries had been living with for years. The dynamics of employment change. Layoffs and call backs that once ebbed and flowed in response to supply and demand become permanent. It's not that workers can't find jobs, but rather that those jobs no longer exist.

Impact: Financial Planning and Investment Implications
Looking to the future, none of the factors that lead to jobless recoveries are going away. Long-term unemployment following economic downturns is likely to be an expected outcome. With this in mind, there are some steps you can take to prepare for this environment.

The first is to live below your means, so that you are not financially devastated by the temporary loss of a job. Working a second job is also a consideration. Having another source of reliable income provides a safety net should your primary source of income disappear. (5 Signs That You're Living Beyond Your Means will help you evaluate your current spending habits, and Two Roads: Debt Or Financial Independence? provide additional information.)

You might also consider a more flexible approach to your job search. While people are often reluctant to relocate, willingness to move can be an advantage if there are no jobs where you currently live. (Once you've made the commitment to watch your spending, The Beauty Of Budgeting will help you accomplish your task.)

Conclusion
During economic downturns, consumers do tighten their belts, but some purchases (food, water and toilet paper for instance) cannot be avoided. When times are tough, firms that sell life's necessities tend to fare better than firms that sell discretionary items. It is often in these industries where job safety can be ensured, despite stagnating economic activity.

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