The Great Recession was a financial crisis that gripped the world in late 2007 and held tight until roughly the summer of 2009. While this period of economic stagnation and decline was a global phenomenon, its impact was especially concentrated in the United States. Over a period of 18 months, one in every five American workers was laid off. This was a catastrophic period in the lives of many Americans. For the nation as a whole this period qualified as the worst economic meltdown since the Great Depression some 80 years prior.
While we entered into a period of slow and steady recovery beginning in 2009, the reality is that many of the effects of the Great Recession have never really left us. Moreover, there may be a clear and direct line between the events during that time and the realities of life in early 2022. As we face down a growing threat of inflation, Congressional grappling over infrastructural needs, and a political landscape that is both sharply divided and marked by a far-reaching sense of economic discontent, this feels like a uniquely appropriate time to reflect on the Great Recession.
Traveling back in time to that transitional period—between the presidential administrations of George W. Bush and Barrack Obama; between the War on Terror and the Occupy Wall Street movement; between nearly two decades of sustained growth and this seemingly sudden implosion of opportunities—we can see some of the writing on the wall foretelling our current situation.
So let’s take a look, not just back at the Great Recession, but inward for a sense of how America became a changed nation in the aftermath of that difficult period. Hopefully, this discussion can lend us some clues about how we might move toward something better in the face of today’s considerable economic challenges.
What Was the Great Recession?
For those of you who were too young to appreciate the gravity of events as they unfurled beginning in December of 2007, or for those of you so deeply traumatized by the events that you’ve somehow managed to erase them from your memory, the Great Recession was a period of dramatic economic downturn that transpired across the better part of two years. The most severe decline took place between December of 2007 and June of 2009.
The Great Recession was the result of numerous intersecting factors but, at its core, the crisis was sparked by instability in the U.S. Housing Market. In the decade prior to the recession, the U.S. experienced a sustained boom in its housing market with construction, home prices, and housing credit all expanding dramatically. Even in the face of a more modest recession in 2001, the housing sector accelerated in growth. In fact, between 1998 and 2006, the average price for a home in the United States more than doubled.
Between 1994 and 2005, home ownership in the U.S. jumped from 64% to 69%. And in just the years between 2001 and 2005, the Federal Reserve reports that an incredible 40% of jobs created in the private sector were related to the housing market. These factors all naturally contributed to a rise in mortgage borrowing and home debt, but it also ushered a large number of risky buyers into the market. Lenders adjusted to accommodate these buyers by offering “subprime mortgages”–mortgages fashioned for borrowers at a higher risk of defaulting with either higher than normal interest rates or adjustable-rate mortgages in which the interest can go up at specified points in time.
Accordingly, says the Fed, “it was difficult for borrowers to obtain mortgages if they were perceived as a poor credit risk, perhaps because of a below-average credit history or the inability to provide a large down payment. But during the early and mid-2000s, high-risk, or “subprime,” mortgages were offered by lenders who repackaged these loans into securities. The result was a large expansion in access to housing credit, helping to fuel the subsequent increase in demand that bid up home prices nationwide.”
The housing market was flooded with credit-risk homeowners. This flood crested when housing prices peaked and began tumbling in the late 2007. As they did, the result was a cascading effect on the U.S. economy that led to a precipitous rise in subprime interest rates, an explosion in mortgage delinquencies, widespread home foreclosures, and the shrinking value of housing-related securities.
The Federal Reserve recognized the threat posed by these trends, and initiated a series of emergency lending programs aimed at propping up banks and investment firms being crushed under the weight of a contracting housing securities market. But these actions failed to prevent the events of late 2008, when major financial institutions like Bear Stearns, Lehman Brothers, and AIG collapsed.
This would set in motion the deepest and most sustained economic downturn in the U.S. since the Great Depression, and ultimately give way to an unusually slow and halting recovering era.
According to Pew, writing in the early outset of this frustrating recovery, “more than half of the adults in U.S. labor force (55%) have experienced some work-related hardship — be it a spell of unemployment, a cut in pay, a reduction in hours or an involuntary move to part-time work. In addition, the bursting of the pre-recession housing and stock market bubbles has shrunk the wealth of the average American household by an estimated 20%, the deepest such decline in the post-World War II era, according to government data.”
While these events are now 15 years behind us, there are concrete connections between the Great Recession and today’s worrisome economic outlook. To provide a better understanding of these connections, we’ve identified a few significant ways in which the effects of the Great Recession are still very much with us.
1. Some Workers Have Never Recovered
While the Great Recession was merely a temporary setback for corporate profits, stock market growth, and even for public funds available at the municipal, state and local levels, the story is quite different at the individual level. For American workers whose careers, lives, and savings plans were interrupted or outright dismantled, the impact has been lasting, possibly even permanent.
In 2017, The Atlantic described a nation that, on the whole, is poor, less productive, less vibrant, less equal, and less optimistic than the nation that we were at the beginning of 2007. A big part of this is felt at the level of individual workers, families, and households, where temporary setbacks quickly spiraled into sustained damage.
According to The Atlantic, there is a well-known phenomenon among economists called “hysteresis.” This term is derived from the Greek word for scars, and suggests that economies which suffer from recessions experience permanent scarring. A nation that experiences a recession doesn’t necessarily just experience a short-term decline in employment and wages. The impact of these events can actually change the long-term trajectory of an economy.
In 2017, the Atlantic pointed out that “The share of Americans between the ages of 25 and 54 who are working or looking for a job has dropped by more than a percentage point since 2007—a number that might sound minute, but translates into well more than a million people not participating in the current economic boom.”
Evidence suggests that this is the continued fallout from events that transpired during the recession. Using millions of anonymized tax returns, a Berkeley economist named Danny Yagan showed a direct correlation between job loss in the recession and joblessness nearly a decade later. According to The Atlantic, “for every percentage point a local unemployment rate increased during the downturn, individuals were 0.4 percentage points less likely to be working in 2015. The intensity of the recession, in other words, squeezed workers out of the labor market. Moreover, as the Great Recession dampened employment, it also dampened earnings, with higher increases in a given area’s jobless rate leading to lower earnings there nearly a decade down the road.”
For Americans who have not reentered the workforce, the downturn was not a temporary crisis. For many, it was the end of a career.
2. Many “Middle-Skill” Jobs Have Disappeared From the Labor Market
The Atlantic reports that a large brunt of the Great Recession was felt by an already shrinking Middle Class. While job loss occurred across the American economy, it was felt most profoundly by those which the Atlantic refers to as “middle skill” workers.
This demographic is generally characterized as having a high school education as well as additional professional training, but typically not a college degree. For workers in areas like manufacturing, telecomm, food services, and administrative work, the impact of the recession was dramatic. In addition to producing widespread layoffs in these areas, the Great Recession saw many of these jobs moving to overseas labor markets where the costs of operation, wages, and regulatory compliance were generally lower.
As a consequence, even as the American economy returned to strength, many of these middle-skill jobs never returned. A National Bureau of Economic Research study showed, in 2015, that “Unemployed middle-skill workers … appear to have few attractive or feasible employment alternatives outside of their skill class, and the drop in male participation rates during the past several decades can be explained in part by an erosion of middle-skill job opportunities.”
The study concluded that as many of these middle-class jobs disappeared from the American labor landscape, workers in these sectors chose retirement in lieu of jobs where no formal skills or training are required. It’s also clear upon reflection that the Great Recession signaled a major acceleration in the move from human labor to automation. Areas like manufacturing and customer service saw a dramatic influx of mechanized solutions to the labor challenges that emerged during the downturn.
The Atlantic noted that “those businesses in hard-hit areas would invest in machines that would reduce the need for human workers at all. All together, the effect was that the Great Recession hastened the economy toward rewarding better-educated workers and robots, to the detriment of people without an advanced degree.”
Workers in areas like automotive manufacturing and textiles had seen their jobs devalued and shipped overseas across a decades-long trend. But in the wake of the Great Recession, the greatest threat to employment in these areas came from within. The economic discontent and disenfranchisement felt by many Americans today—especially those living in the so-called Rust Belt states such as Ohio, Pennsylvania and Michigan where manufacturing once fueled the American economy—can be traced at least in part to the wholesale move toward automation in many industries. One could argue that technological advances have made such trends inevitable. But the Great Recession accelerated this transition at a time when American workers were most vulnerable.
3. The Millennial Generation is Still Behind Schedule
If a generation of American workers suffered untold setbacks at advanced stages in their career, this pales in comparison to the long-term consequences for the economy’s new entrants. There has likely not been a less fortuitous time to graduate from college than the late Aughts.
According to an article published through the University of Pennsylvania’s Wharton School of Business, the impact on career prospects and financial planning for young people was particularly profound and lasting. Those just graduating from college or at the earliest stages of career development were invariably among those most deeply affected. Writing a decade later in 2018, the Wharton School pointed out that “A generation of young people entering the job market had their careers disrupted by it. The fact that this age group continues to delay buying houses, having children, and other markers of stable, adult life is largely attributed to this.”
The traditional marker of continued American growth and prosperity is the presumption that each generation will experience greater economic opportunity than the generation which came before it. The generation of Americans entering the job market during the Great Recession would arguably be the first generation in nearly a century to experience lesser opportunity.
Even as the Great Recession subsided, a generation of college graduates carried exorbitant college debt into a world of stagnant wages, underemployment, and in far too many cases, subsistence in jobs for which no college education is needed. The last of these consequences is especially problematic. Graduating from college into a job with a lower skill threshold, and with lower earnings, is not merely an instance of paying dues on the way to a better opportunity.
When this occurs in a sustained period of economic downturn, it can carry lifelong career and earnings consequences for those graduating at the height of economic despair. According to a composite of studies published in Econofact, “U.S. college graduates who graduated between 1974 and 2011 found that earnings are roughly 10% lower in the first year for those who graduate into an economy with a 4 percentage point higher unemployment rate (the increase seen in a large recession).”
This much is predictable. But what may not be as well understood is the long-term persistence of this effect. With fewer hours of work available, and lower wages offered from the outset, those who graduate and begin working during a recession will experience approximately 1.8% income loss during the first decade of employment relative to those graduating in more prosperous periods.
But it goes deeper than that. “Beyond wages and work hours,” says Econofact, “there is evidence that cohorts that graduate into recessions have statistically and substantively lower employment rates throughout their careers.”
For many young workers, settling for lesser employment opportunities during the Great Recession was a matter of survival. But today, many of those same workers are toiling at salaries that are lesser than their peers just a few years older or younger, and often with less job security as well.
4. The Emergence of the Gig Economy
On the subject of less job security, another observable trend that remains with us to date was the rapid growth of America’s “gig economy.” As opportunities for full-time or long-term employment evaporated, many Americans turned their energy toward low-commitment work with fast turnaround. The restaurant and food-service industries have long facilitated this type of employment. But a growing number of sectors developed models of employment with similar features.
According to the Wharton School, “The fact that so many people took temporary jobs, often as contractors, was pushed along by the downturn, in part because employers were so unsure about the future but also because workers had no choice but to take them…Good employee-management practices took a big step back during this period because employees were willing to put up with anything as long as they had a job.”
It was within this space that major delivery services like GrubHub and DoorDash either came to be or accelerated in growth, and when driving services like Lyft and Uber hit the streets. In the immediate aftermath of the recession, companies using gig-labor models were fueled by an emergent class of workers who were willing to work on an independent contractor basis. The success of such companies helped to spawn a thriving sector of the economy built on the labor of freelancers. However, it has also produced a wider swath of American workers subsisting without salaries, benefits, health coverage, or long-term job security.
5. Aging Workers Have Delayed Their Plans For Retirement
While more than a decade has passed since the Great Recession ended, this is a mere blink of an eye for American workers who spent 60 years investing toward retirement, only to watch their life savings turn to dust during 18 months of economic despair. Many who were inevitably nearing the end of their careers during this time made the decision instead to continue working. This is especially true of those who, just a few years from scheduled retirement in 2008, were among the casualties of skyrocketing unemployment.
While some percentage of these aging workers were able to secure new jobs, the impact on retirement planning is one that many still feel today. According to the Wharton School “Those workers who kept their jobs or found new ones following the crisis are now facing the prospect of needing to delay retirement while having a much smaller nest egg to rely on. Many economists foresee global capital markets paying much lower expected returns on investments in the future compared to the past, and that will influence work, retirement, saving and the investment behavior of older Americans, according to a working paper from Wharton’s Pension Research Council.”
Essentially, for workers nearing the end of their full-time earning power, the Great Recession brought about a reduced opportunity for wealth creation through tax-qualified 401(k) retirement accounts. To compensate, many Americans who suffered setbacks during the Recession are now working until later in life and claiming their Social Security benefits later in life.
***
The continued impact of the Great Recession feels especially pertinent today as we grapple with another period of tremendous economic uncertainty. Like the Great Recession, the COVID-19 pandemic has had a dramatic impact on the labor landscape in the U.S. Countless careers have been disrupted. Industries have contracted and are approaching recovery in the face of an extremely hazy future. Trends of automation are of even greater appeal to employers from the perspective that robots don’t carry communicable diseases. Sharp spikes in pricing across the global economy portend the danger of inflation.
None of this is to suggest that another crippling recession is in our immediate future. However, we also can say with certainty that it isn’t. What we can say with certainty is that the visible scars from our last recession are still major pain points in the American economy. And they still threaten the continued prosperity of all Americans. As we work toward recovery from the pandemic, and reversal of the current trends in consumer pricing, a real and lasting recovery will also depend significantly on how well we bring along those hardest hit by current economic realities. We continue to pay for our failure to do so more than a decade ago.