The Recovery from the Great Recession: A Long, Evolving Expansion

• Author: Jay C. Shambaugh,Michael R. Strain
• Published date: 01 May 2021
• Date: 01 May 2021
• DOI: 10.1177/00027162211022305
• Subject Matter: Overview Papers

28 ANNALS, AAPSS, 695, May 2021

DOI: 10.1177/00027162211022305

The Recovery

from the Great

Recession: A

Long, Evolving

Expansion

By

JAY C. SHAMBAUGH

and

MICHAEL R. STRAIN

1022305ANN The Annals Of The American AcademyThe Recovery From The Great Recession

research-article2021

Prior to 2020, the Great Recession was the most impor-

tant macroeconomic shock to the United States’ econ-

omy in generations. Millions lost jobs and homes. At its

peak, one in ten workers who wanted a job could not

find one. On an annual basis, the economy contracted

by more than it had since the Great Depression. A slow

and steady recovery followed the Great Recession’s

official end in summer 2009, but because it was slow

and the depth of the recession so deep, it took years to

reduce slack in labor markets. But because the recovery

lasted so long, many pre-recession peaks were exceeded,

and eventually real wage growth accumulated for work-

ers across the distribution. In fact, the business cycle

(including recession and recovery) beginning in

December 2007 was one of the better periods of real

wage growth in many decades, with the bulk of that

coming in the last years of the recovery.

Keywords: recession; wage growth; business cycles;

monetary policy

Prior to 2020, the Great Recession was the

most important macroeconomic shock to

the United States’ economy in generations.

Millions lost jobs and homes. At its peak, one in

ten workers who wanted a job could not find

one.1 On an annual basis, the economy con-

tracted by more than it had since the Great

Depression. Asset prices fell sharply. Policy

interest rates hit their lowest level in history,

and deficits spiked.2,3 The jury is still out on the

severity and lasting duration of the Pandemic

Jay C. Shambaugh is a professor of economics and

international affairs at George Washington University

and a faculty research fellow at the National Bureau of

Economic Research.

Michael R. Strain is the director of economic policy

studies and Arthur F. Burns Scholar in political econ-

omy at the American Enterprise Institute and a research

fellow at the IZA Institute of Labor Economics.

NOTE: We thank Duncan Hobbs for excellent research

assistance.

Correspondence: michael.strain@aei.org

THE RECOVERY FROM THE GREAT RECESSION 29

Recession, but it would not surprise us if history remembers the Great Recession

as the more significant macroeconomic event of the two.

A slow and steady recovery followed the Great Recession’s official end in sum-

mer 2009, but because it was slow and the recession was so deep, it took years to

reduce slack in labor markets. Despite steady job growth, the share of the popu-

lation that was employed stayed well below pre-recession levels for years, and

wages grew slowly.

But because the slow-and-steady recovery lasted so long, many pre-recession

peaks were exceeded, and eventually real wage growth began to accumulate for

workers across the distribution. In fact, the business cycle (including recession

and recovery) beginning in December 2007 was one of the better periods of real

wage growth in many decades, with the bulk of its gains coming in the last years

of the recovery.

Despite eventual gains for workers, the longest expansion in U.S. history fea-

tured slow productivity growth and slower output growth than many experts

expected. It was supported by accommodative monetary policy for an extended

period. As we discuss in this article, fiscal policy was more variable, supportive

early in the recovery before pivoting to a contractionary stance, and then featur-

ing a surge of deficit spending late in the expansion.

The economic expansion following the Great Recession included the longest

streak of job growth on record. Beginning in October 2010, the economy added

jobs for 113 consecutive months. The streak ended in March 2020 when the

COVID-19 recession began.

Because the expansion was so long, it was able to go through different phases.

Early in the expansion, jobless rates remained stubbornly high, participation

rates continued falling, and wage growth was slow. Later in this article, we show

that compared to their outcomes prior to the recession, the least-educated,

lowest-wage workers in the labor market fared considerably worse than more-

educated, higher-wage workers.

But by 2014, wages began to grow faster at the median. By 2015, prime-age

labor force participation began to increase. In the last five years of the expansion,

wage growth had picked up at the bottom of the income distribution, outpacing

gains in the middle and at the top of the distribution. Employment rates for the

workers with the least education rose further above their pre-recession level than

those for college graduates. Vulnerable workers saw their labor market prospects

improve considerably. The length of the expansion—which allowed the labor

market to tighten—was critical to both bringing people back into the workforce

and seeing wage gains pushed across the income distribution.

The length of the expansion and continual job growth highlight in some sense

how long the economy had extensive labor market slack. The loss of jobs in the

first two years following the start of the recession (peaking at 8.7 million jobs),

the increase in the unemployment rate by 5.3 percentage points, and the decline

in participation were so stark during the financial crisis that there was a large

amount of labor market slack when positive job growth did begin. In addition, the

financial crisis struck when there was arguably still labor market slack following

the 2001 recession.4 The combination of the challenges monetary policy faces