Adjusting to Economic Shocks Tougher than Thought

Mark Muro at Brookings:

Adjusting to economic shocks tougher than thought: The mathematical models of economic theory have always sacrificed a bit of on-the-ground accuracy for what has been assumed to be a larger measure of insight.  Work on how local labor markets respond to shocks like mass layoff events and recessions is a case in point.  While the near-term pain of these shocks has raised more and more questions, the conventional wisdom of a relatively benign “adjustment” period over the medium-term has largely survived. The general consensus: Workers and local economies will adjust. Dislocated workers will leave distressed regions and move to healthier ones. Jobless rates will revert to the mean.  

Yet it now appears this consensus view of dislocation and recovery is breaking down.

In the last six months a burst of new empirical work—much of it focused on the region-by-region aftermath of the Great Recession—is shredding key aspects of the standard view and suggesting a much tougher path to adjustment for people and places.

Overall, the new research ... shows that the reality of adjustment is far from automatic, far from quick: ...

As to the upshot of this work, it’s increasingly clear that policymakers need to be thinking much more urgently about how to provide for and accelerate adjustment for the victims of economic shocks. ...