July 9, 2012
The Worst Recovery Since World War II
The Worst Recovery Since World War II-Becker
The latest jobs report on Friday confirmed that this is by far the slowest US recovery from a recession in employment as well as income since the end of World War II. Four years after the start of the recession in 2008, American unemployment is still above 8% compared to lower than 5% in 2007. The severity of the financial crisis implies that this would be a steep recession, but a continuation of the recession for 4 years suggests that other factors have also been in play.
Before addressing these factors, it is important to recognize the seriousness of the unemployment figures, aside from the high rate. The great majority of workers can pretty well handle, both psychologically and financially, short spells of unemployment because they can consume out of past savings, they can borrow on credit cards and from relatives, and they can spend their unemployment compensation. Far more difficult to adjust to is long-term unemployment since financial resources get exhausted, skills depreciate, and there is a heavy psychological burden of not working, and not knowing when, if ever, good jobs will become available. Unfortunately, this American recession has high levels of persistent long-term unemployment: about 29% of all the currently unemployed have been out of work for over a year, and 40% have been without work for 6 months or longer. These depressing figures do not even count the large numbers of unemployed who gave up looking for work and left the labor force, or the many workers who are working part time at jobs with much lower hourly wages than they had before the recession.
The newspaper headlines after the jobs report were that only 80,000 jobs were added in June. That is correct, but this number gives a highly misleading picture of the number of new hires. The Job Openings and Labor Turnover Survey (JOLTS) data give monthly aggregate new hires, job separations, and job openings –the latest data are for April 2012. They show aggregate new hires by the American economy in recent months of not 100,000 or so, but over 4 million workers. These numbers are matched by a similar number of job separations that result when workers are fired, laid off, or quit- surprisingly in this weak economy, more than half the total separations are due to workers quitting their jobs. The net difference between hires and separations during the past few months has been only a little more or a little less than 100,000 workers.
Equally important as the hires and separations are the more than 3 million job openings each month, with most of them remaining unfilled. An important puzzle that I do not believe has been resolved is why so many available jobs have not been filled as this recession continues with its high levels of unemployment.
The JOLTS data bring us back again to the question of why the recovery of the American economy has been so slow, with no signs of gathering strength. Contributing to the slow recovery, aside from the severity of the financial crisis, is the crisis in the euro zone brought on by the weak competitive positions of countries like Greece and Italy, and excessive government borrowings by several countries from banks in other countries. The sizable slowdown in the growth rates of China, India, and Brazil has added to the problems of the world economy because these developing countries helped to sustain the growth in world GDP during the first couple of years of the recession.
I believe two other factors are also important (see my blog post "Why has the Recovery in Employment in the US been so Slow?" 5/6/12). One, stressed by Casey Mulligan, is the growth of many means-tested policies during this recession that encourage some workers to leave the labor force or look for part time work so that they can qualify for mortgage and other government-provided benefits. Of course, the government aid eased the burden of unemployment to the families that qualified for the benefits.
The second, and probably more important, factor is the effects of the sharp rise in indexes of economic and policy uncertainty during this recession. Scott Baker, Nicholas Bloom and Steven Davis in a couple of papers not only document this rise in uncertainty, but also show that spikes in the degree of uncertainty experienced during this recession, including the past year, significantly negatively impacts employment for up to two years after the spikes. American households and businesses faced with such large uncertainty tend to be cautious about their investments in consumer and producer durable goods. As a result, American businesses have been reluctant to take on enough additional workers to bring unemployment rates down to more reasonable levels.
Why Is Job Growth Tepid?—Posner
The unemployment rate has been 8.2 percent for three months now, creating concern that we are in a high-unemployment equilibrium. The unemployment rate is not a very good measure of the employment situation, because it excludes discouraged workers—persons who are not looking for a job. The number of discouraged workers actually dropped slightly in June. On the other hand, the number of underemployed workers rose slightly, causing the total of un- and underemployed to rise from 14.8 to 14.9 percent. Yet there has been a net increase, though a small one, in the number of new hires and in average wages. The safest observation is that no significant trend is visible in the data for the past quarter.
In another six weeks it will be four years since the financial crash that set off the steep economic downturn in which the nation and the world still find themselves. The downturn stopped years ago but the economy has stalled. Apart from the high unemployment rate, it is noteworthy that personal consumption expenditures per capita, corrected for inflation, are exactly where they were in 2007, before the crash, even though the savings rate, which soared in the immediate aftermath of the financial collapse, has receded to the low pre-collapse level, in part because of very low interest rates, which make saving money unattractive. It is noteworthy as well that inflation expectations are very low, implying that demand for products and services is not expected to increase significantly; an alternative possibility, however, is that producers have excess capacity because current demand is weak, in which event, given the current unemployment, producers may be able to hire workers to meet a surge in demand without incurring higher unit costs of production and therefore without raising prices.
Consumption drives the U.S. economy. If consumption is stagnant, there is no incentive to expand production. In the wake of the financial collapse of September 2008, companies slashed their work forces—and when personal consumption expenditures returned to their pre-crash level discovered that they could satisfy consumption demand with a smaller workforce, and still can, and if they do not anticipate higher consumption in the near term they have no incentive to expand their workforces. This seems to me the most economical (in the Occam's Razor sense) explanation for the current high unemployment rate.
One can imagine an increase in consumer demand abroad stimulating export production and therefore employment in export industries, but foreign consumer demand is on the whole stagnant also, and our export producers face fierce competition from countries that are trying to increase their own exports. And U.S. federal and state government spending, while it plays an important role in maintaining private incomes and thus personal consumption expenditures, is not doing much more for the economy; government purchases of goods and services are down, and government at all levels is laying off workers and thus contributing to unemployment.
I am intrigued by the possibility that the economy actually stopped growing in about 2000 as a result of foreign competition, increased automation (which perturbed labor markets), decline in quality of education, economic mismanagement by federal, state, and local government (irresponsible spending and fraudulent accounting seem endemic characteristics of our state and local governments), inattention to serious economic problems such as our very badly designed tax code, and misallocation of resources, with excessive resources going into housing construction. An appearance of growing prosperity was maintained by public and private borrowing at very favorable rates made possible by the mercantilist policies of foreign countries like China, Japan, and Germany. House prices soared because housing is the product preeminently bought with debt, and the savings rate plummeted because home equity value was rising, while consumption soared as people took out second mortgages or home equity loans on their appreciating homes and spent the proceeds on personal consumption.
Still, the economy has righted itself to the extent that it is no smaller than it was before the crash; the contrast in this regard between 1929-1933 and 2008-2012 is reassuring. But how is it then that less labor is being employed? One possibility is that the shock of the crash accelerated a trend toward more efficient use of labor, as a result of greater automation (with low interest rates reducing the relative cost of capital expenditures and thus encouraging the substitution of capital for labor) and improved techniques of selecting and supervising employees. In the long run, more efficient production through more efficient utilization of labor should, by reducing costs and therefore prices, stimulate demand and therefore supply. But three months is not the long run; and thus far a rapid growth in productivity is not visible in the statistics.
The unusually uncertain political environment may be retarding employment. The reason is not that this is a presidential election year, but that the two political parties seem so far apart regarding policy. The Republicans in Congress will for understandable political reasons do everything they can to prevent the economy from improving before, and possibly after, the election, because they are committed to the position that Obama is responsible for the high unemployment rate. Romney may of course win, and no one knows what policies he would follow as president and with what effect and whether the Democrats would adopt the same obstructionist, scorched-earth policy as the Republicans have (probably they would). Nor is it clear, or even likely, that either party has a politically feasible program or prospect of meaningful economic reform. The impact of the Affordable Care Act that the Supreme Court has now upheld is highly uncertain. Political uncertainty is a retardant to economic recovery, but I would be inclined to place greater emphasis on weakness in demand in consequence of the sharp drop, triggered by the financial crash of September 2008, in household wealth and employment prospects.