Service Based Economy = Longer Recoveries?

From Martha L. Olney and Aaron Pacitti:

Recovery from recessions takes longer than it has in the past.

The current crisis aside, this change has not happened because recessions themselves are longer. Nor has it occurred because recessions are deeper than in the past. Instead this change is the result of slower economic growth following the end of a recession. And slower growth means longer recoveries.

As shown below, the four longest recoveries in recent history, as measured by the number of months it took until the economy recovered all of the jobs lost during the recession, also have been the four most recent recoveries—those that followed the recessions of 1981, 1990, 2001, and 2007.

Why is it taking longer and longer for the U.S. economy to recover from recessions?

We argue that the shift from being a goods-producing, manufacturing-based economy to a service economy — what some have termed “deindustrialization” — is causing the pace of economic recoveries to slow…

The U.S. economy is much more service-dependent today than it was back then. Since 1950, services have risen from 40 percent to 65 percent of output and from 48 percent to 70 percent of jobs…

Goods-producing businesses are not dependent on domestic demand to increase production as the economy comes out of a recession. They can produce in anticipation of increasing demand or in response to increased external demand. Either way, domestic demand need not increase before goods production increases. Service producers are not so lucky…

Service producers must wait until the customer or patient is present, for only then can they produce. The greater the share of services in the economy, the greater the share of businesses that must wait for domestic demand to actually pick up before they can increase production. And thus, the more services an economy produces, the longer it will take for a recovery to take hold.

You should read the whole post. At this time I have not read the underlying paper, so I cannot fully comment. However my initial thoughts are that I can see how a service-based economy might be a part of why recoveries take longer, but I’m not sure a service-based economy accounts for the majority of the difference. Sticky-wages, low inflation, and mild austerity—just to name a few—would all seem to play a role in the slowness of the current recovery.

Perhaps I will blog more on the subject after I get a chance to read the paper.

FYI: here is a graph of the ratio of service-based employees as a share of total non-farm employees:


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