Is There a 'Cleansing Effect' of Recessions?

Russell Sage Foundation
Principal Investigator: Till von Wachter


Different tribes of economists tend to view recessions quite differently. Keynesians suggest that recessions result from economy-wide slumps in demand and do not produce a lasting change in industrial structure. An alternate view, often associated with Joseph Schumpeter, is that recessions promote “creative destruction” and help reallocate labor and other resources away from less-productive firms to more-productive competitors. Much is at stake in this debate. If recessions reinforce pre-recession employment trends, the pattern should have important implications for how to restructure job training and job search programs. But if recessions actually have a ‘cleansing effect,’ and improve the efficiency of the economy, that might call into question the need for macro-economic monetary and fiscal policies designed to moderate downturns.

There is little direct evidence one way or the other about how recessions affect the distribution of employment across industries and firms. Using data going back to 1977 from the U.S. Census Bureau’s County Business Patterns Survey, Till von Wachter of Columbia University will conduct a comprehensive study of the last four recessions in the U.S., including the Great Recession. His basic analytic strategy will be to see how well post-recession employment levels and trends at various points in time after each recessionary trough can be forecast using pre-recession employment trends. Von Wachter will also use data from the National Establishment Time Series (NETS) to analyze the recessions’ effects on the levels and trends of employment by firms – to see whether recessions accelerate the movement of workers from weaker to stronger firms.

Results will be published in several journal articles.