Slow Recovery in US Employment?

Sorry for this late post

Gary Becker

The April US employment report gave mixed signals. The good news is that employment grew by 300,000, and the employment gain in March was revised upwards from 160,00 to 230,000. But in seeming contradiction, the unemployment rate also rose by two percentage points, from 9.7% to 9.9%. Which of these figures gives a better indication of the speed and breadth of the American recovery from a deep recession?

The employment figures are consistent with the solid growth of 3.2% in real GDP during the first quarter of 2010. Economists trust employment data more than unemployment datat since the latter is subjective, as unemployment figures depend on how many persons are actively looking for work. The unemployment rate excludes men and women who lost their jobs but have given up finding new ones. It also excludes potential new entrants to the labor market who would like to be employed, but are not actively looking for work since they do not expect to find anything. Such an explanation of the difference in the change in employment and the change in unemployment would suggest that the underemployment rate fell since the measure of underemployment includes people whose hours have been reduced, or who are working part-time because they cannot find full time work. Yet contrary to these expectations, the reported underemployment rate also increased, from 16.9% to 17.1%.

In most other respects, the anatomy of unemployment has been no different during this recession than other severe recessions. Most of the unemployed are young and have limited education and other skills. Long term unemployment-those unemployed more than 6 months- now accounts for almost half the unemployed, up from 40% in February of this year, and from 22% in February of 2009. As is typical during serious recessions, long-term unemployment grew a lot as the recession became more severe and prolonged. The fraction of the unemployed who are long term unemployed usually rises even after a recovery begins since the unemployed who have not been able to find jobs for many months are among the least likely to find employment during the early stages of a recovery.

Employment has been growing more slowly than is typical during this recovery. Usually, an economy recovers faster after severe recessions than after mild recessions because greater pent up demand by consumers and investors accumulates during severe recessions. For example, the recovery was very strong in 1983 after a prolonged recession when unemployment peaked at 10.8% in December of 1982, higher than the peak unemployment rate of 10.2 in October 2009. The recovery was even sharp during the Great Depression years of 1934-36 until a second severe dip began in 1937.

GDP grew sharply not only during the first quarter of this year, but even more rapid at 5.6% during the last quarter of 2009, and decently at 2.2% during the third quarter of 2009. So GDP is growing at reasonably good rates, although it is not booming. GDP grew, for example, considerably faster during the all the quarters of 1983 after the severe recession that peaked in December 1982. The difference between the much faster rates of growth in GDP than in employment during much of the Great Recession, and so far during the recovery period, is the result of the continuing improvement in labor productivity, measured by output per employee or per hour worked.

The typical pattern during most recessions is for measured labor productivity to fall as good employees are kept on even though they do not have much to do, and as fixed capital is underutilized. Yet productivity continued to grow during most of this past recession. A common explanation for this improvement in productivity is that businesses tried to squeeze more out of their employees and capital because times were bad. However, times are bad during all serious recessions, yet measured productivity usually falls. The EU has had a more serious recession in GDP than did the US, yet EU countries followed the typical patter with reductions in labor productivity during the recession.

This growth in labor productivity during the recession of 2007-09 suggests that unemployment may fall more slowly than is typical after a severe recession because growth in GDP will be achieved in good part through further improvements in labor productivity. Why the recovery in employment and in unemployment has been relatively slow, given the severity of the recession, is not completely clear, but I believe one factor is the uncertainty about the policies that Congress and President Obama are impatient to implement.

Among the issues of concern to businessare how severe will be the new regulations of the financial sector? Will taxes be raised on individuals with higher incomes and corporations? Will a stiff carbon tax be introduced? Will trade unions be encouraged? Will the Justice Department adopt a new approach to anti-trust policy that is less pro consumer and more pro competitors of successful businesses? Will caps and other restrictions on the pay of top executives be continued and expanded? Members of Congress and persons close to President Obama have discussed these and other possible policies that may have discouraged many businesses from rapidly increasing employment and investments in capital.

To be sure, other uncertainties are likely also affecting business hiring, such as whether the EU will experience a double dip because of its sovereign debt crisis, or whether China will have to cut back because of excessive inflation and structural defects. But the US government does not control most of these other uncertainties. It does control its own policies, and they should be pro a private enterprise competitive economy rather than anti big and small business, and pro big unions.