Recessions can have a negative impact on the labor market that may last for decades

It is likely that the corona crisis will have long-term consequences for many people’s earnings and their chances of finding employment. Individuals operating in local labor markets that were relatively strongly hit by the Swedish crisis in the 1990s had an 8–9 percent lower earnings growth two decades later compared to individuals in labor markets that were not affected as severely. This is shown in a new SNS report by economists Mattias Engdahl and Martin Nybom.

Individual earnings growth is largely affected by the economic conditions at the local labor market in which people operate. A weaker labor market not only means that many people may lose their jobs, but also that those who still have a job may find it difficult to advance in their career or move to other, more well-paid jobs. As a result, recessions may have long-term effects.

In their SNS report, Engdahl and Nybom show that people working in municipalities strongly hit by the crisis in the 1990s exhibited a significantly smaller earnings growth relative to comparable people living in municipalities that were less severely affected. The researchers show that these differences remained in the decades after the economy recovered.

“In our view, it is likely that the present corona crisis will also have long-term consequences. This applies to, for example, young people entering the labor market, people who have lost their jobs as a result of the crisis and people working in strongly affected local labor markets,” says Martin Nybom.

The report also gives an indication of the groups most affected by deteriorating labor market conditions at the local level. The authors show that the long-term, persistent and negative effects for women were more than three times larger than for men. The results also indicate that individuals without post-secondary education and individuals born outside the Nordic countries were more affected by the crisis in the 1990s. At the same time, Engdahl and Nybom highlight that the current crisis differs from the crisis in the 1990s in a number of respects.

“The corona crisis initially had a strong impact on the service sector, which was not the case during the crisis in the 1990s. In addition, the current crisis has resulted in both increased demands and opportunities for remote work, which is likely to have different implications for different groups in the long term. The crisis in the 1990s was also much more severe,” says Mattias Engdahl.

However, it is still uncertain how the corona crisis will progress, and major stimulus measures have been put in place to counter the recession. Martin Nybom:

“Financial policies have so far been expansive, both in Sweden and in other countries, which may mitigate the effects of this crisis compared to the crisis in the 1990s. It also has a very practical solution – herd immunity via mass vaccination – which gives us hope for a relatively quick recovery of the economy.”

About the authors and the report

Mattias Engdahl received his PhD at the Department of Economics at Uppsala University in 2013. Since 2017, he has worked as an analyst at the Institute for Evaluation of Labour Market and Education Policy (IFAU).

Martin Nybom received his PhD in Economics at Stockholm University in 2013. Since 2017, he works as a researcher and associate professor at IFAU.

The report “SNS Analysis 74: Long-term effects of recessions: Lessons from
the Swedish economic crisis in the 1990s” is based on the report Labor Market Effects of Recessions (IFAU Report 2021:8, original Swedish title Arbetsmarknadseffekter av konjunkturnedgångar).

Down load SNS Research Brief 74. Long-term effects of recessions: Lessons from the Swedish economic crisis in the 1990s. English Summary.