Fasten Your Seatbelts for the Jobless Recovery...
7/18/09 11:19 AM
Grasping Reality with Both Hands The Semi-Daily Journal of Economist Brad DeLong: A Fair, Balanced, Reality-Based, and More than Two-Handed Look at the World J. Bradford DeLong, Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.
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Fasten Your Seatbelts for the Jobless Recovery...
http://delong.typepad.com/sdj/2009/07/fasten-your-seatbelts-for-the-jobless-recovery.html
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Fasten Your Seatbelts for the Jobless Recovery...
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As of this writing, it looks as though the average unemployment rate in 2009 is going to average at least 1.5 percentage points above where last December the incoming Obama administration thought that it was likely to be. Instead of the 7.8% http://delong.typepad.com/sdj/2009/07/fasten-your-seatbelts-for-the-jobless-recovery.html
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points above where last December the incoming Obama administration thought that it was likely to be. Instead of the 7.8% forecast last December, year-2009 unemployment looks to average 9.3% or higher. Year-2009 real GDP also looks to be lower than the income Obama administration was forecasting last December: $11.40 rather than $11.53 trillion. The macroeconomic news has been bad. The financial crisis that gathered force from the summer of 2007 through the summer of 2008 and then exploded after the collapse of Lehman brothers did more damage to the economy than the consensus of forecasters had imagined. Back in the 1960s one of President Johnson's economic advisers, Brookings Institution economist Arthur Okun, set out a rule of thumb other quickly named "Okun's Law": if production and incomes--GDP--rises or falls 2% because of the business cycle, the unemployment rate will fall or rise by 1% along with it: the magnitude of swings in the unemployment rate will be half or a little less than half the magnitude of swings in GDP. Why? For four reasons: (a) businesses will tend to "hoard labor" in recessions, keeping useful workers around and on the payroll even if there is temporarily nothing for them to do; (b) businesses will cut back hours when unemployment rises, and so output will fall more than proportionately because total hours worked will fall by more than total bodies employed; (c) plant and equipment will run less efficiently when hours are artificially shortened because of the recession; and (d) some workers who lose their jobs won't show up in the unemployment statistics but will instead retire or drop out of the labor force. For all four of these reasons, whatever rise in the unemployment rate we see in a recession is supposed to be a fraction of the fall we see in GDP relative to trend. But this time we are not following this rule. This time Okun's Law is being broken. The unexpected 1.2% extra decline in real GDP in 2009 should have been accompanied by an 0.5 or 0.6 percentage-point rise in the unemployment rate, not by the 1.5 percentage point rise in the unemployment rate we are now seeing. I confess that the fact that this is happening comes as a surprise to me. But when I think back we have seen this before. In 1993--two full years after the National Bureau of Economic Research had called the end of the 1990-1991 recession--the unemployment rate was still higher and the employment-to-population ratio lower than it had been at the recession trough. And we saw the same "jobless recovery" after the recession of 2001: it took 55 months after the formal end of the recession in November 2001 before a greater share of Americans had jobs than had had them in November of 2001. It is likely to be a recovery. The central tendency forecast right now is that real GDP contracted at a rate of 1% per year or less between the first and second quarters of 2009, and will grow between the second and third quarters at a rate of 2% per year or so. When the NBER Business Cycle Dating Committee gets around to it, it is most likely to call the end of the recession for June 2009, second most likely to call it's end in April, and a recession-end date later than June 2009 is a less likely possibility. One reason that we are likely to see a recovery starting... right now... is the stimulus package. It probably boosted the real GDP annual growth rate relative to what otherwise would have been the case by about 1.0 percentage point in the second quarter, and is going to boost the annual GDP growth by about 2.0 percentage points between now and the summer of 2010--after which its effects tail off. But it will not feel much like a recovery. After the 1982 recession the turnaround in employment lagged the turnaround in GDP by only six months. Thereafter employment growth was very strong: in the eighteen months up until the end of 1984, growth in work hours averaged 4.8% per year. it took only 7 months after the 1982 recession trough for the employment-topopulation ratio to rise above its trough level (1980: 2 months. 1975: 5 months. 1970: 18 months. 1961: 13 months. 1958: 4 months. 1954: 8 months.) By contrast, it took 29 months after the 1991 recession trough for the employment-to-population ratio to exceed its trough level, and 55 months after the 2001 recession trough for the employment-to-population ratio to do so. Productivity growth in the immediate aftermath of the end of the 1991 and 2001 recessions was surprisingly rapid: rapid enough to eat up all of real demand growth and more as businesses decided to take advantage of the economic downturn to slim down their labor forces and become more efficient. Today--unless we get much faster real GDP growth than currently looks to be in the cards--we are headed for a jobless recovery. The answer to the economic question--was the stimulus sufficient to rapidly return the economy to something like normal unemployment?--is likely to be: "h--- no, it was much too small..." http://delong.typepad.com/sdj/2009/07/fasten-your-seatbelts-for-the-jobless-recovery.html
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Fasten Your Seatbelts for the Jobless Recovery...
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Comments You can follow this conversation by subscribing to the comment feed for this post. But why do jobless recoveries happen now, when they didn't used to? Posted by: Noah | July 17, 2009 at 09:41 AM For the same reason CEOs make 300x the lowest-paid worker instead of 7-10x: Because they can. Posted by: Ken Houghton | July 17, 2009 at 10:27 AM And what is the effect of the joblessness of the recovery on future burden of current deficit spending? Seems like our children and grandchildren will be poorer indeed - some because of lacking jobs, others because of carrying burden of deficit payback and trend toward growing disparity in income between top and middle. Posted by: MaryLou | July 17, 2009 at 10:58 AM Maybe we need a new stimulus, maybe we don't. Recessions these days seem to be accompanied by structural changes in the labor market that may be somewhat immune to macroeconomic stabilization measures. In the early 1990's we had the wave of corporate downsizings that affected a lot of people in middle management. The collapse of the tech bubble after 2000 let to a huge slump in tech jobs. And now jobs are being lost in construction and finance that won't return any time soon. That's not saying that the existing stimulus was a bad idea. It's just we can't expect miracles. Posted by: Phil P | July 17, 2009 at 11:04 AM I believe the main reason jobless recoveries occur today when they didn't 30 years ago is outsourcing. 30 years ago, once production picked up at the end of the recession, employers had to hire more workers in order to increase production. Today, they simply call their factotum in China and say, "We need more widgets" and the workers get hired in China instead. So what employers today are using recessions to do is shed expensive U.S. workers, and those jobs never come back. That's the system we've built with WTO/GATT/etc., so that's the results we get. Does anybody really think this is good for the average American? How? Posted by: Badtux | July 17, 2009 at 11:05 AM Hoarding labor occurred when labor was considered to possess certain skills that could not be easily re-created in a new workforce. Oddly enough, many of these jobs were in the manufacturing sector. Now that ours is mostly a service economy, the considerations seem to be different. For example, look at the wholesale firing of workers at Circuit City a while before their final implosion---the workers were considered dispensable, especially when lower cost workers were available. That, I'm afraid, is the current outlook for many employers. It is the most knowledgeable (and expensive) workers who are let go first. Try to get a job when you are over 50. http://delong.typepad.com/sdj/2009/07/fasten-your-seatbelts-for-the-jobless-recovery.html
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Fasten Your Seatbelts for the Jobless Recovery...
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This effect will become even more significant as more people are without jobs or without the job they want. When people are lined up for any job, hoarding labor in a down economy makes no sense. The second effect in the last few recessions is that cost pressures have driven businesses to seek less labor-intensive ways of doing things and to outsource work to other lower-cost places. Why would it be different this time--people want lower prices which can be most often be had from foreign sources. We are clearly moving into a regime of long-term unemployment and under-employment. Posted by: Neal | July 17, 2009 at 11:19 AM You say, "jobless". I say work less! You say, "jobless". I say work less! http://econospeak.blogspot.com/2009/07/jobless-recovery-v-working-less.html Posted by: Sandwichman | July 17, 2009 at 11:31 AM Um, just to help there, sandwhichman, working less involves getting not paid. When you've got that fixed, call me.
Posted by: Barry | July 17, 2009 at 11:49 AM Brad - you might notice that the first 'jobless recovery' was in the early 1990's, the next in the next recession, and a probable one now. One obvious way to look at this was that something changed in the 1980's. We're dealing with a **different** economy. This means that a lot of rules of thumb from the pre-OPEC/Reaganomic/Chicago economy just don't hold anymore. Posted by: Barry | July 17, 2009 at 11:50 AM If you take into account the current job losses and how long it took to recover the jobs lost in recent recessions, it is quite easy to project a decade or so before the lost jobs are recovered. And this does not take into account population growth and added jobs needed for that population. Long term under-employment and unemployment is the future. Posted by: Neal | July 17, 2009 at 12:14 PM "Recessions these days seem to be accompanied by structural changes in the labor market that may be somewhat immune to macroeconomic stabilization measures." Other changes, too, which will impact demand and, therefore, the job market. For a long time. Millions of people lost more than just a "job." A guy pushed out of his company five years before retirement sees his pension projections fall off a cliff. Instead of getting, say, $2000/month starting the month he retires, he will get $1000/month five years after he is let go (and inflation will reduce the purchasing power of even that $1000, making it effectively, at 3 percent inflation, $850). He will be losing $12,000/year for the rest of his life. To him, a $400 stimulus check is a cruel joke. As for a job, he can get a job the day after he's let go, but he's never going to really recover. There is a lot the GDP and unemployment rate miss. Posted by: Will Fletcher | July 17, 2009 at 06:26 PM Comparatively large economies have longer, in time, Euler paths toward full employment. But the technology shocks keep on coming, forcing re-aggregations. Posted by: Mattyoung | July 18, 2009 at 05:40 AM Badtux has it right. Since we outsourced manufacturing to China, when jobs begin to pick up it will be in China, not here. Only the unemployed are concerned about this. Posted by: CN | July 18, 2009 at 07:22 AM Could you post the excel file for the first graph? I'd like to pass this on, but it's got all these typos. Posted by: John | July 18, 2009 at 08:07 AM Don't forget that during the 1980s period, the Fed changed monetary policy targets and the Reagan folks were on a fiscal spending spree for military hardware (i.e. Let's bankrupt the USSR). We don't have that kind of flexibility that we had back then for rampant http://delong.typepad.com/sdj/2009/07/fasten-your-seatbelts-for-the-jobless-recovery.html
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spree for military hardware (i.e. Let's bankrupt the USSR). We don't have that kind of flexibility that we had back then for rampant deficit spending (even though though they said it wasn't Keynesian style fiscal stimulus)and lower interest rates (post double-digit CPIs). That's kind've an outlier period, I would say, for this analysis. Posted by: Kathryn Huff | July 18, 2009 at 08:18 AM Someone has got to explain to me how you get a jobless recovery at all anymore. Where's the money for the additional consumer demand coming from? It's not like it's going to be borrowed like the last recovery. It's either wages or nothing, right? Posted by: TJ | July 18, 2009 at 08:47 AM "...working less involves getting not paid. When you've got that fixed, call me." Calling Barry, Got it fixed. Working less involves getting paid MORE. Not my conclusion but a reasonably widespread view among first rate economists in the early decades of the 20th century. It was based on both historical and experimental evidence. Even Henry Ford bought into the argument -- but he didn't invent it. The New Deal ditto. "...studies have shown that, in the long run, there is an inverse relationship between hours and income both on an hourly and weekly basis. The definitive study was Paul H. Douglas's "Real Wages in the United States: 1890-1926," covering a period when hours rapidly declined. Douglas, echoing the conclusions of the French economist F.S. Simiand, found that real hourly wages increased more rapidly in industries that were cutting hours relative to those where hours were steady." Reactionary employers and academic yes men didn't buy the argument or pay any attention to the evidence, though. They held to a vulgar 'classical' view that unions are evil and that low wages and long hours build character and expand employment. Of course, if you start from ASSUMPTIONS rather than from evidence and if you ASSUME, contrary to evidence, that wages and productivity vary proportionately to changes in hours -- or if you ASSUME, contrary to theoretical insight, that the current hours of work are, by definition, optimal -- then all the evidence in the world won't make any difference. This is especially so if your assumptions conveniently echo the propaganda of reactionary employers' associations. "...working less involves not getting paid"? Tell that to John R. Commons, Paul Douglas, Sydney J. Chapman, Alfred Marshall, A.C. Pigou, J.R. Hicks, J.M. Keynes, etc. etc. etc. The cream of the crop of pre-war Institutionalist and Neo-classical economics. And to repeat, the evidence was never refuted. It was simply replaced with contrary assumptions. see: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1125543 http://econpapers.repec.org/article/tafrsocec/v_3a65_3ay_3a2007_3ai_3a3_3ap_3a279-291.htm Posted by: Sandwichman | July 18, 2009 at 10:49 AM
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