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This explanation links two major ideas that help to explain the jobless recovery in the US which is far worse than that in several other countries affected by the recession. Changes in management behavior, and the weaker bargaining position of employees, led to a 30% increase in job loss from the recession compared to prior periods. The slow recovery is explained by the double hangover caused by the collapse in housing prices; a rapid rise in the household debt to income ratio from 90% in 1995 to 130% in 2007, and the loss of local and state government jobs due to declining tax revenues.
The weak recovery in the US demonstrates the ineffectiveness of monetary policy in the current downturn. The Fed has kept interest rates at an historically low level but they have not stimulated business investment or consumer spending. Business won't invest in new capacity unless demand increases, and consumers are paying down their debt instead of spending.
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