Explaining US Employment Growth after the Great Recession: The role of Output-Employment Non-linearities

We investigate the relationship between employment and GDP in the United States. We disentangle trend and cyclical employment components by estimating a non-linear smooth transition error-correction model that simultaneously accounts for long-term relationships between growth and employment and short-run instability over the business cycle. Based on out-of-sample conditional forecasts, we conclude that, since the end of the 2008–09 recession, US employment is on average around 1% below the level implied by the long run output–employment relationship, meaning that about 1.2 million of the trend employment loss cannot be attributed to the identified cyclical factors.