Capacity and employment in the Great Recession

Although it is difficult to compare the present events to those of the “Great Depression”, they repropose two old questions: Does a fall in aggregate demand have a direct impact on the labour market? Does a rebound in production imply a recovery in employment? The paper stresses the role of aggregate demand and slack capacity. While spare capacity may stimulate quantity adjustment strengthening the relationship between aggregate demand and labour performance in recession, the rebound can imply other forces (technical and structural change). However, the peculiarity of the present recovery is better understood within the aftermath of a financial bubble.