Question

 

What do you think could have contributed to the long-lasting deterioration of matching efficiency during and after the Great Recession?

Answer 1

Matching efficiency or turnover in labor market was largely contributed by failure of banks due to subprime mortgage crisis which eventually led to force closure and layoffs at larger level.

Also after the Great recession ended nearly 30 percent and above corporates had poor financial results and deterioration in cash flows and balance sheets which froze hiring to unpredicted and unprecedented levels and thus labor turnover was high after the recession as well.

The above graphs show how unemployment increased to 11 percentage and above and work productivity declijed during Great Recession and subsequently the government had adopted expansionary monetary policy to cit down interest rates to 0.75 percent and hold constant till 2015 and indulged in buying 800 billion dollar government securities as part of open money operations and quantuat3easing programme.

The interest rates prior to 2007 from 2005 were relatively higher as contractionary monetary policy was practised by US FEd due to high inflation and hot money flowing in from Asian financial markets.

The period of 2010 to 2015 saw interest rates constant, coupled with an expansionary fiscal policy like unemployment insurance, program like TARP and TNAF and tax cuts and tax credits to businesses.

The macroeconomic intention here was to revive the economy to greater heights and minimise deflation such that the US dollar also stabilises and inflation targets remian well within 3 percentage band.

This crested ripple effect as liquidity rose substantially and disposable incomes rose for 22% of individuals after tax cuts, unemployment insurance provided the fillip, and unemployment reduced due to higher credit availability to corporate which all sledgehammered the economy to better position of 0.5% year on uear GDP growth and ultimately fructifying to robustness by end of 2015 post which US fed looked to raise the interest rates after Donald Trump election in 2016.