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Whatever Happened to the Business Cycle? A Bayesian Analysis of Jobless Recoveries

During the typical recovery from U.S. postwar period economic downturns, employment recovers to its pre-recession level within months of the output trough. However, during the past two recoveries, employment has taken up to three years to achieve its pre-recession benchmark. We propose a formal empirical model of business cycles with recovery periods to demonstrate that the past two recoveries have been statistically different from previous experiences. We find that this difference can be attributed to a shift in the speed of transition between business cycle regimes. Moreover, we find this shift results from both durable and non-durable manufacturing sectors losing their cyclical characteristics. We argue that this finding of acyclicality in post-1980 manufacturing sectors is consistent with previous hypotheses (e.g., improved inventory management) regarding the reduction in macroeconomic volatility over the same period. These results suggest a link between the two phenomena, which have heretofore been studied separately.

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