Preventing the next recession is important – economic decline disproportionately affects lesser educated people and minorities more

Recessions happen frequently—there have been 7 recessions in the last 50 years (National Bureau of Economic Research [NBER] n.d)—and they cause disruption and damage to individuals and communities. The Great Recession of 2007–9 was the most-severe economic downturn since the Great Depression. It did long-term damage to businesses; state, local, and federal budgets; and people’s life trajectories. Its effects live on in diminished prosperity for many Americans. In the years since the Great Recession, economists have studied which policy responses worked and which ones did not, and two findings stand out: First, fiscal policy is an important tool to combat a recession; and second, it is crucial to have a quick and effective response to a recession to limit its longest-lasting and most-severe effects.

Recessions cause sizable damage in the short term and lead to millions of lost jobs and hundreds of billions of dollars in lost output. Over the last 4 recessions, as shown in figure 1, the unemployment rate rose 2 to 5 percentage points, leaving millions of workers without jobs. Output also fell on average by about 2 percent (roughly $400 billion as a share of the current economy).

By several measures, the Great Recession left the labor market in a prolonged period of weakness that lasted many years. In October 2009 the unemployment rate peaked at 10 percent, double the rate in 2007 and a level unmatched since 1983. The unemployment rate did not fall back below 5 percent until late 2016—over seven years after the recession officially ended. The long-term unemployment rate—defined as the fraction of people in the labor force who have been searching for at least 27 weeks—rose well above its December 2007 level of 0.9 percent and its previous high (in June 1983) of 2.6 percent, reaching an April 2010 peak of 4.4 percent. The long-term <<Figure 1 omitted>> unemployment rate did not fall below its prerecession level until March 2018; it currently stands at 0.8 percent (see figure 2). A broader measure of unemployment—which includes those without jobs who are not actively seeking work but who want a job and have searched for one in the past 12 months, and those who are working part time but want a full-time job—peaked at just above 17 percent in late 2009 and early 2010, and remained above 10 percent well into 2015 (Bureau of Labor Statistics [BLS] 2009–15; authors’ calculations).

UNEQUAL EFFECTS OF RECESSIONS The effects of this broad joblessness impose steep costs on the most vulnerable individuals. When jobs are harder to come by, they are especially difficult to obtain for workers who face structural disadvantages. Unemployment rates for blacks and Hispanics are higher than for whites in both good and bad economic times, but when a recession strikes, the costs fall even more sharply on minorities. For example, the unemployment rate for blacks tends to be twice the rate for whites, and we can see this in the data: in 2007, the average black unemployment rate was 8.3 percent, more than double the 4.1 percent rate for whites. When the unemployment rate hit its peak of 10 percent in October 2009, white unemployment reached 9.2 << Figure 2 omitted>> <<Figure 3 omitted>> <<Figure 4 omitted>> percent while black unemployment hit a shockingly high 15.8 percent (see figure 3).1 The unemployment gap between the educated and the less educated also widened during the Great Recession (see figure 4). Between 2007 and 2010, the unemployment rate for college graduates rose from 2.0 percent to 4.7 percent. For those with some college experience but not a four-year degree, the unemployment rate rose from 3.6 percent to 8.4 percent. For high school graduates who never attended college, the unemployment rate rose from 4.4 percent to 10.3 percent. And for high school dropouts, the unemployment rate spiked from 7.1 percent to 14.8 percent. The gap in unemployment rates between those with a college degree and those with less than a high school degree rose from 5 to 10 percentage points—evidence that the most vulnerable are most in danger of losing their jobs in a recession.