Questioning Conventional Wisdom — “Jobless Recovery”

By Marc Seltzer; originally published January 6, 2010

Don’t be too sure

. .

“Jobless Recovery”

No adjective characterizes political and media discussions of the recovery from the 2008 recession more than the word “jobless.”

Is it true?  Have the stars aligned to deny us a bright future?  Should we be worried?

LIBERAL EXPRESSIONS OF CONCERN

One way to evaluate what people are saying is to look at their motivation.  In this case, liberals and conservatives are both motivated to characterize the job prospects as worse than they likely are.  Many liberals, such as outspoken Nobel Laureate Economist Paul Krugman, want the government to take action in support of job creation so they focus on the high unemployment rate.  Ten percent is certainly higher than a more ideal 5 or 6 percent that would be a healthy level for the economy, if it were not in either an excessive boom or bust cycle.  But the current high unemployment reflects the depth of the recession, not a “jobless” recovery.

In 2009, the growth rate only turned positive in the third quarter.  Jobs are a lagging indicator and always follow the business turn-around and improvement in growth rate by many months.

Thus, the 2009 recovery is not “jobless” because unemployment has not yet come down.  Every recession involves the loss of jobs and every recovery involves the improvement in business conditions and higher growth rate long before jobs return.

Professor Krugman is worried about a weak recovery and thus wants to see additional stimulus aimed at creating jobs.  He is particularly concerned that the slow return of jobs creates great suffering and harms employment prospects for the long-term unemployed.  His proposals could help alleviate high unemployment and move the economy more quickly towards full employment, but they do not indicate that this is a jobless recovery whereas other recoveries were not.  Rather they reflect the fact that the severity of the recession led to millions of layoffs and that it will take time for millions of workers to be rehired into the labor market.

HOW ABOUT THOSE REPUBLICANS?

On the other side of the isle, the Republicans are constantly saying that the Obama administration actions such as stimulus spending and health care reform are bad for the economy and that we are headed for a jobless recovery.  However, it serves the Republican political goals if the Obama administration can be described as failing to lead an economy out of recession.  Millions of people are unemployed and many who are employed face job insecurity.  The Republicans exploit this to political advantage by claiming that current policies are wrong and pointing to a “jobless” recovery as evidence of failure.  The Republicans will continue to have every incentive to claim that Democratic policies are causing a jobless recovery until the 2010 elections.

But that doesn’t make it so.  Remember that it is far quicker to lay off employees than it is to rehire them.  Layoffs can be done by thousands on a single day, while rehiring takes substantial human resource department efforts, paperwork and staffing in itself.  Unless employees were simply furloughed, a thousand employees laid off in a single afternoon could take months to rehire in ordinary conditions.  For this reason, and because the recession of 2007-2008 involved a spectacular financial crisis with fast and deep layoffs, reaching a peak 750,000 a month in January of 2009, unemployment may only decrease by 750,000 to two million new jobs a year in coming years.  Remember, we lost more than seven million jobs.

Nonetheless, six to eighteen months after the growth rate becomes strong, we should expect to see substantial gains in employment.  It will be correct to say during the recovery that jobs are not created as fast as they were lost, but that is a hardly the standard for a “jobless” recovery.  The real key is the growth rate.  It reached more than 2% in the third quarter of 2008.  Six months from now it should be higher still.   The activity is reflected in increased hours and temp job hires for now, but inevitably job creation will follow.

The real question is whether innovative action in the public and private sector can increase the speed of job creation without distorting the marketplace and creating waste.  Nations such as Germany subsidized jobs during the crisis to limit layoffs.  Many nations, including ours, supported public and private sectors with stimulus spending, preventing layoffs from getting worse than they did.  Now, the question is whether means will be found to efficiently return to higher employment more quickly than in other deep recessions.

May 6, 2010 UPDATE:  Recent jobs data finally confirming predictions:  Denver Post

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One response to “Questioning Conventional Wisdom — “Jobless Recovery”

  1. FRANK L. WHITMAN

    the republican party needs for the OBAMA ADMINISTRATION TO FAIL AND WILL DO ANYTHING AND EVERYTHING TO SEE THAT THIS HAPPENS,BECAUSE THEY KNOWN THAT IF NOT IT COULD MEAN THE END OF THE REPUBLICAN PARTY

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