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Thursday, September 04, 2003

Job-Loss Recoveries

Brad has an extremely useful piece about the current recovery. It seems Okun's law doesn't work too well these days:

We used to have considerable confidence in Okun's law: that an extra one percentage point rise (or fall) in the unemployment rate over a year would reduce (or boost) that real GDP growth by an extra 2.5 percent over that year because a rising (or falling) unemployment rate would also be accompanied by a falling (rising) share of the population in the labor force and by falling (rapidly rising) productivity. Productivity would fall when the unemployment rate rose for two reasons: first, even when factories are not running at full capacity they still incur substantial setup and maintenance costs; second, even when there isn't enough work for them to do firms would rather hold onto skilled workers than watch them drift away and have to pay to train their replacements the next time the wheel of the business cycle turns.

Things have been different, however, in this recession (and to a lesser extent in the preceding early-1990s recession. The standard relationship between output growth and hours worked has gone substantially awry.............The fact that falling hours have been accompanied by rapidly-rising productivity is what has given us not a jobless recovery but a massive job-loss recovery. The normal pattern we would expect from the past two years' output growth would be that employment and hours would have been nearly flat. Why the different pattern this time? We think that it is because firms are no longer "hoarding labor" when times are slack because the industries losing jobs no longer expect employment to bounce back. This means that we no longer have any confidence that we understand the cyclical pattern of productivity growth--which means that we have little ability to translate the (high) productivity growth numbers we see into information about what the underlying long-run trend growth rate of the economy is.
Source: Semi Daily Journal

To elaborate on why this might be Brad picks up a piece from Erica Groshen and Simon Potter of the New York Federal Reserve Bank:

The divergent paths of output and employment in 1991-92 and 2002-03 suggest the emergence of a new kind of recovery, one driven mostly by productivity increases rather than payroll gains. The fact that no influx of new workers occurred in the two most recent recoveries means that output grew because workers were producing more. Although one might speculate that output increased because workers were putting in longer days, average hours worked by employees actually changed little during this and the previous jobless recovery.

Recessions mix cyclical and structural adjustments. Cyclical adjustments are reversible responses to lulls in demand, while structural adjustments transform a firm or industry by relocating workers and capital. The job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid-off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes, however, are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job.

A preponderance of structural--as opposed to cyclical--adjustments during the most recent recession would help to explain why employment has languished during the re-covery. If job growth now depends on the creation of new positions in different firms and industries, then we would expect a long lag before employment rebounded. Employers incur risks in creating new jobs, and require additional time to establish and fill positions....

The difference from the pattern of the early 1980s is quite stark: now, the industries cluster heavily in the two structural quadrants. Most of the industries that lost jobs during the recession—for example, communications, electronic equipment, and securities and commodities brokers—are still losing jobs. Balancing the structural losses of these industries, however, are the structural gains of others. For example, nondepository financial institutions, an industry grouping that includes mortgage brokers, added jobs during both the recession and the recovery. The trend revealed in Chart 4 is one in which jobs are relocated from some industries to others, not reclaimed by the same industries that had lost them earlier. The chart provides persuasive evidence that structural change predominated in the most recent recession...
Source:Has Structural Change Contributed to a Jobless Recovery?: Erica Groshen and Simon Potter NY Federal Reserve

Now the interesting, really interesting, thing in all this is what is happening on the structurl side. It is here were we will find that much longed for 'new sector' which can square the numbers and fulfill Brad's long-term dream. Unfortunately the only sector I can see (and you need to go over to Brad's place and look at the diagram for this) is what they call non-depository financial institutions, which seems to be heavily oriented towards mortgage brokers. This could lead us to the only sector with positive structural growth during this downturn was one whose principal business activity was facilitating that US citizens get into even greater debt. I'm not convinced that this is the recipe for the future we're all looking for.

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