Comments for Why So Many Jobless Recoveries, Recently?

Why So Many Jobless Recoveries, Recently?

2009-07-07T15:59:51Z

Employment is a lagging indicator in economic downturns, which means you don't often see a recovery in the jobs market until months after other factors -- like consumer confidence and the stock market -- have long recovered from their recession lows. But in the last two recessions, employment has lagged for a much longer time, by historical standards. What accounts for this, and can we expect a similar "jobless recovery" in 2010?
]]> First, here's a colorful look at past recessions. You can see pretty clearly that the job losses beginning in 74, 80 and 81 all recovered relatively quickly from their bottoms. This is what economists sometimes call a V-shaped recovery, because the bounce from the bottom is steep enough to create the semblance of a single bottom point. But in the last two recessions, you can see that there is no single, pointy bottom to the recession -- instead, there's a lingering U-shaped trough that drags on for months, even after the recession is, by many other accounts, over.
Why does this happen? The Economist's Free Exchange blog has some theories:

One is that wages can't fall low enough to clear markets. Supply may have so swamped demand for low-skilled workers that a wage rate near zero would have to prevail to encourage hiring, and of course, a wage rate near zero is not legal.

Another is that the prevailing wage rate is below the prevailing reservation wage for most workers. Unemployment benefits aren't particularly generous, but available work may be very unpleasant, and declines in housing and energy costs have increased the purchasing power of whatever savings or income the unemployed do have.

Another possibility is that there are available wage rates that would suit both employer and employee, but other factors are preventing a match. Geographic mismatch could be an issue, for instance--the jobs could be in one place and the people in another, with no means available to move.

And another option might be the effect of structural change in the economy. If workers are highly uncertain about where new jobs will appear, they may delay training or relocation until they have a better idea where job opportunities will be.

These are all interesting, but I'd also like to re-introduce another theory that we can call the Mandel Theory of Growth, based on some recent Michael Mandel pieces in BusinessWeek. Mandel has theorized that America has experienced a lost decade in private sector growth, largely due to the failed promise of US innovation to create jobs in the private sector that aren't dependent on government assistance in the health care and education sectors. Mandel explains that the last 10 years have produced a net of less than 1 million jobs, the worst decade in jobs ever measured in the last half century. This is what our job growth looks like if you account for the health care/education sector:
I think this speaks the last reason offered by the Economist folks -- that the country isn't responding to structural changes in the economy and as a result, the engine of growth over the last ten years has been in those industries most closely aligned with the public sector. To be sure, this could be the result of overcrowding, as health care spending continues to eat up a larger percentage of our GDP each year. But it's also cause to ask: How do we remake an education system (or retraining system?) that prepares future generations for that structural change so that every recession doesn't lead to a U-shaped job recovery?

Comment from ez on 2009-07-07

2009-07-07T16:30:33Z

To critique Mandel's analysis:

The private sector employment levels in 1999 were truly exceptional and unprecedented. At that time, we were undergoing one of the biggest investment led bubbles in American history and had one of the lowest unemployment levels in decades. To use that year as a comparison point with 2009 is highly misleading. The reality is that there was an enormous amount of capital available for private tech investment at that time, which will probably never happen again in our lifetimes. A better comparison point might be 1989 or 1979.

Comment from newdealanne on 2009-07-07

2009-07-07T17:02:23Z

It's a good point, ez. Related to it is a gender question, too: Men are losing jobs faster than women, but are they jobs women will take up? There's an interesting take on how gender affects the labor optimum here.

Comment from Derek Thompson on 2009-07-07

2009-07-07T19:01:31Z

That IS a good point! And it's similar to what my colleague Dan said about Mandel. The beginning and end points of this decade are too "lucky" for his analysis -- using the end of the 90s and the nadir of the recession. But I guess what I'm asking is: What the heck is up with the last two recessions then? Especially in 2001 -- the downturn wasn't so deep and yet we didn't make the jobs back for almost 4 years. Maybe it's because unemployment started off very low, or maybe it has to do with structural changes in the economy that our labor force/education system haven't caught up with.

Comment from mq55555 on 2009-07-07

2009-07-07T20:34:50Z

Updated your chart up to july job losses below (2nd chart on page)- crazy stuff

http://www.ritholtz.com/blog/2009/07/percentage-job-losses-post-wwii-recessions

Your chart is 4 months behind, adding in the recent losses looks like a smack in the face.

Comment from Derek Thompson on 2009-07-07

2009-07-07T20:38:48Z

Oh god, yeah, thanks for the update. But it's still up in the air whether that horrible gash of job losses across the Ritholtz graph turns out to be a V or a U that lingers for a long time like a hill bottom rather than a valley.

Comment from ez on 2009-07-07

2009-07-07T21:45:10Z

Yeah, I would most likely agree with the structural argument. In older recessions (like from the 50s and 60s), the downturn was more cyclical and people laid-off from factory jobs could quickly return to similar factory jobs once consumer demand picked up. But in a complex knowledge economy like the present, in which growth is heavily skewed among skilled workers in emergent industries, it takes time for a labor force to adapt. Laid-off tech workers from the 2001 recession could not suddenly become real estate agents or financial analysts to adapt to the new growth industries of the past decade. But after several years, the labor force eventually adapted itself to the new realities.

I think we'll see the same slow and painful process with the next recovery, as former real estate agents, construction workers, and bankers gradually transform themselves into nurses or civil engineers, or whatever.

Comment from Tim Fowler on 2009-07-08

2009-07-08T17:44:36Z

e: "that the country isn't responding to structural changes in the economy and as a result, the engine of growth over the last ten years has been in those industries most closely aligned with the public sector"

You might try to look at that the other way around. That the growth has occurred in the public sector, taking up resources that could have been used to expand the private sector. Not only do you have labor and money moving to the public sector (and thus from the private sector), but the additional regulation and intervention from the public sector has a negative effect on private sector growth.

Its not the the private sector hasn't grown but that its grown less because of the public sector growth, and at the same time innovation increases productivity which allows for more production per employee, and thus less jobs when your not getting strong growth.

Comment from urbanimage on 2009-07-12

2009-07-12T05:35:35Z

the difference between government (no $ to be made) is service versus profit (private enterprise). Comingling has occured to the point of no return......Outsourcing is part of the problem.....The solution are jobs that require knowledge in services of technology...Instead of replacing plane/car computers...update them! Instead of recycling the materials in the computers...update them for other uses....The humans are able to rejuvinate provided the economy is tight....The incentives/accountabilities will get the intellectual labor market open/moving....The standards should be raised for all imports... (not tarrifs)...The labor boundaries/standards must enforced....Quality control of improvements must be enforced! The stimulus needs to reach the individual in a timely fashion....almost immediately.....Confidence in the market will follow the action!!!

Comment from emanroga on 2009-07-16

2009-07-16T19:58:01Z

Well put. But the same can be said of the employment rates in 2006, fueled by a credit/construction bubble. Which suggests that those are not aberrations; instead something keeps blowing bubbles, which is hurting the ability of the economy to make structural changes in a more gradual manner because you either have very high labor and hiring costs during the booms, or very low revenue during the busts. It also hurts corporate R&D, which thrives on continuity. It isn't usually the first thing on the chopping block for companies; eventually it goes as something of a desperation move by a company. In a long recession R&D gets a lot more exposed.