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More Thoughts on Job Creation in the Recovery

Sunday, 09 June 2013 04:56

Having gotten a few e-mails I thought I would add a few more words on job growth in the recovery. There are some basic facts on the growth and jobs story that I thought were not entirely clear in this NYT piece.

First, the basic problem is that growth has been extremely weak in this recovery. Annual growth has averaged just over 2.0 percent in this recovery. That is pathetic, it is below the underlying trend rate of growth, which is in the neighborhood of 2.4 percent. This means that the economy has actually been falling further behind its potential level of output even during the recovery.

Growth during a recovery is usually proportionate to the severity of the downturn. When we had severe downturns in 1974-75 and 1981-82 we saw years of growth in excess of 6 percent. If this recovery were like other recoveries that is what we would be seeing. By comparison, the 2.0 percent growth we actually have seen is dismal. No one should think that growth has been anywhere close to acceptable in the recovery.

Just to be clear, this is not because the Obama administration has been especially inept in dealing with the economy. They have been inept, facts speak for themselves and millions of people are needlessly suffering as a result, but the nature of the problem they faced was qualitatively different than in other downturns.

Other recessions, except for the 2001 downturn, were caused by the Fed raising interest rates to combat inflation. Even though these recessions all caused great pain in the form of unemployment/underemployment, there was an obvious way to counteract these downturns: lower interest rates.

The story of these prior downturns was that high interest rates led people to stop buying cars and houses. This created a huge amount of pent-up demand for cars and houses. When the Fed lowered interest rates demand in these sectors exploded providing the kindling that set the recovery on its course.

However the current downturn was not caused by the Fed raising rates, it was caused by the burst of a housing bubble. This meant both that there was not a huge amount of room for the Fed to lower interest rates (hence the turn to unorthodox monetary policy) and there was no pent-up demand for housing. In fact the opposite continues to be the case. As a result of the building boom during the bubble years, the country still has a record vacancy rate due to an oversupply of housing.

There was a falloff in car demand and there has been a subsequent recovery, but that has less effect than it did 30 years ago because a much larger share of the value added in the auto industry is imported. This means that we should not have expected the same sort of rapid bounce-back that we saw from other downturns unless the government took extraordinary measures, like large stimulus (much larger and longer than we saw -- as some of us said at the time) or pushing down the value of the dollar to boost net exports.

Okay, so given that we are seeing weak growth, how are we doing on the job creation front? I argued that because of extraordinarily weak productivity growth, we are doing surprisingly well on the job creation front. Given our trend rate of productivity growth going into the downturn was around 2.5 percent, we would have expected almost zero job growth in an environment of 2.0 percent GDP demand growth. The increase in demand could be met pretty much entirely from improved productivity rather than with increased employment. Yet, we have actually been creating 1.8 million jobs a year over the last three years.

This is due to the fact that productivity growth has plummeted in this recovery. In normal times, we want strong productivity growth. (Why would we ever want to waste people's time?) But in a period of high unemployment, productivity growth is the enemy of jobs. For this reason the slower than normal rate of productivity growth we have seen in this upturn has been a gift. It has allowed millions of people to get jobs who would otherwise be unemployed.

That being said, as the NYT points out, other countries have done better. Germany stands out in this respect, having seen a sharp rise in its employment to population ratio since the beginning of the downturn, and a decline in its unemployment rate of 5.4 percent, in spite of a recovery that has been no stronger than in the United States.

Part of Germany's story is a slower rate of growth of its labor force, but the main part of the story is work sharing and other policies that encourage employers to keep workers on the payroll, even if they work fewer hours. These policies have been remarkably successful in shielding German workers from the worst effects of the downturn.

So to sum up, the main reason that so many people are unemployed four years into the recovery is weak GDP growth. This was predictable given the nature of the downturn. Given the weakness of this growth, the U.S. has done a pretty good job creating jobs. However other countries, most notably Germany, have done much better in translating weak GDP growth into jobs and they provide important lessons to the United States.

Comments (10)Add Comment
Productivity Versus Growth
written by Last Mover, June 09, 2013 7:48
It also helps to be clear on the difference between productivity and growth.

At the macro level in the short run, growth defines productivity in terms of changes in total output per unit of labor (and other inputs), while at the micro level labor productivity is also associated with variations in (potential) productivity of individual employees independent of growth (or productivity when growth is at a maximum).

These two can easily get confused, for example with claims that unemployment is structural rather than cyclical which requires that potential growth via added demand already exists and the problem is finding more skilled (more productive) employees to meet that demand.

That's entirely different from the productivity that can arise from spurts in growth from a recovery following a recession, where an existing stock of underutilized labor can become more productive merely by virture of added growth in sales volume.

Of course when new net jobs are added in a recovery, that has to be adjusted to separate and account for the difference in added productivity due to growth (that takes up the slack in demand) versus the added productivity associated with the additional jobs created.

In this context the interesting result of what Dean Baker has been explaining lately about productivity and growth is whether the output gap is shrinking or staying the same.

If actual output and potential output are both trending downwards that is a worse case, meaning productivity is falling at the same time aggregate demand is still insufficient to achieve full employment. Living standards are falling at the same unemployment does not improve.

If the output gap is closing that means either lower productivity is pushing downwards from the topside to reduce living standards or more growth in total output is pushing up from the bottomside, either way indicating the macro problem of insufficient demand is correcting itself.
Is there a secular component to the shortfall in demand?
written by A Populist, June 09, 2013 7:58

It seems to me that the lack of demand has a strong secular or chronic component.

There have been a series of bubbles during recent decades (Tech, Internet, housing).

Even at the peaks of these bubbles, there has not appeared to have been a shortage of workers driving general price and wage inflation, as we saw prior to the early eighties.

Also, from 1990, there has been a long downward trend in interest rates. Despite the failure to "take away the punch bowl" - wages and general prices have not spiked.

Isn't it reasonable to ask the question of whether we have a secular lack of demand, and not just a "cyclical" one? My main point: If we were to somehow enact a massive government stimulus, should we expect that to translate into a self-sustaining recovery in jobs and higher wages? Or should we just expect another bubble? I understand that the private debt which fueled previous bubbles would not be present in a *government* funded stimulus, thus avoiding some tendency for a subsequent "bust". But do you envision some type of fundamental change to be caused by the stimulus, to allow removing that stimulus without a subsequent bust?

Also, regarding a possible cause for a secular lack of demand: What about Inequality? Stiglitz has posited that inequality is reducing demand. Krugman, OTOH, says he sees no proof of that. Well, it is fine to avoid concluding something without proof. But in the absence of proof, one still must have a default assumption. Should the default assumption be that inequality is *not* reducing overall demand?

I am with Stiglitz on this one.

It seems to me that redistributing money upwards (lower wages after adjusting for productivity and inflation) is going to reduce overall demand. This just seems obvious - give money to people who don't have enough, and they will spend more, or maybe work less - either one of which will help our biggest problem (unemployment).
German Work Sharing Is Just Spreading Unemployment Around
written by Paul Mathis, June 09, 2013 8:23
Germany is in yet another recession because it has done little to stimulate demand in its economy. Rather than spreading unemployment burdens throughout the workforce with work sharing, Germany should be doing everything possible to increase domestic consumption and government spending, as Keynes prescribed.

Instead, Germany is doing its best to export its unemployment to the U.S., Europe and China by increasing its trade surplus. Such beggar thy neighbor policies are antithetical to Keynesian concepts.
written by skeptonomist, June 09, 2013 10:16
Dean gives a good account of the factors affecting speed of recovery, at least since around 1965, but on the subject of productivity growth everyone seems to be overanalyzing while failing to take account of historical patterns.

Productivity is highly erratic on a quarterly basis, but there is a fairly consistent pattern; it tends to drop off sharply in a recession, then bounces back immediately afterwards. This bounceback typically does not last long. After the strong bounceback, it resumes the normal up and down course. This presumably has to do with temporary changes in production and firing and hiring patterns in and after recessions, not anything fundamental in production efficiency. Probably production drops off sooner than employment in a recession.

This was repeated in the late recession; there was a drop and then a very strong bounceback after 2009, but now productivity growth has dropped to a low level, which is actually not worse than before the recession. This seems to be fairly normal so far - it remains to be seen whether productivity growth will stay low.


As I've said before, worker productivity is a derivative measure and it is a mistake to consider short term changes as giving fundamental information about the economy.
The Dark Side of Germany's Supposed Job Miracle
written by Ellis, June 09, 2013 11:49
Dean Baker conveniently forgets the very rapid growth of Germany's low wage sector.
According to Reuters, "Labor office data show the low wage sector grew three times as fast as other employment in the five years to 2010, explaining why the 'job miracle' has not prompted Germans to spend much more than they have in the past.

"Pay in Germany, which has no nationwide minimum wage, can go well below one euro an hour, especially in the former communist east German states.

"I've had some people earning as little as 55 cents per hour," said Peter Huefken, the head of Stralsund's job agency..."

According to Der Spiegel:
"One in five Germans falls into this [Low Wage] category and almost two out of every three is a woman, the DIW reports...
"According to a DIW study published last year, wages fell in real terms for all but the top 10 percent of earners in Germany between 2005 and 2010... Increasingly, such wage disparity is leading to social inequality in Germany...
"Last year, The Economist celebrated the successful German economy with an article entitled, "Angela in Wunderland." But for the millions of low-wage workers not feeling the benefits of the economic upswing, such praise is just as unconvincing as scenes from the fantastical novel the headline invokes..."
Just as unconvincing are economists here who want us to believe that the grass is greener in Germany.
Energy costs up since 2000
written by Joe T., June 09, 2013 12:07
From Jeremy Granthem interview on Charlie Rose:

Sorry, no access to a PC today and this video requires Flash, which my phone doesn't support, so I can't view it to give the details. But in essence he said that GDP growth benefited in the last many decades from low energy costs. Easily extracted energy is no longer available (since about 2000), and those higher energy costs are reflected in lower GDP growth (he gave numbers).
written by watermelonpunch, June 09, 2013 8:09
A Populist wrote:
Even at the peaks of these bubbles, there has not appeared to have been a shortage of workers driving general price and wage inflation, as we saw prior to the early eighties.

I highly recommend to you an excellent book by Louis Hyman called "Debtor Nation".
As far as I'm concerned, all your questions are answered to my satisfaction by Hyman (albeit not directly), with no need for Stiglitz nor Krugman on this issue. ;)
I don't know what kind of proof we need or how one would go about proving anything, but it seems obvious to me why there was not the wage inflation during peaks of bubbles.

@ Ellis
I still think maybe the grass is just a tad greener in Germany.
One wonders how much those 55cent/hr workers are receiving in health care coverage.
At least people working for peanuts can see doctors & get proper medical care of some type. That counts for a lot more than a couple dollars per hour in wages I believe.
written by Min, June 10, 2013 6:55
Is it not true that one reason for continued high unemployment is the loss of gov't jobs, while private sector jobs have recovered pretty well?
How do we have growth without adding to the climate change problem?
written by John Wright, June 10, 2013 10:24
From my vantage point, the economic powers of the world are still promoting the growth agenda that will continue to add to the climate change problems.

In other words, we are in an environmental hole and continuing to dig deeper hoping to get out of it.

And barring some technological breakthough/miracle (cold fusion?), the USA is making the problem worse with the economic growth agenda and attendant CO2 production pushed by many.

The opportunities for economic improvement exist in those activities that don't add incremental CO2, which would be in making processes more energy efficient such as removing costly government subsidies of inefficient farming, export subsidies, shrinking the military and taxing energy to encourage lower use.

It is likely we should be targeting LOWER consumption.

But none of this seems to be happening.

If we need to get to a smaller USA economic pie with more equitable sharing, there seems to be little movement in that direction.

I suspect the "gotta have more growth" economists will be viewed by history as the re-incarnation of the Mayan priests pushing to sacrifice more virgins to get out of the Mayan environmental crisis of 8th and 9th centuries.

As environmentalist Guy McPherson states, "mother nature bats last".
Chief Engineer
written by Chris Scruton, June 12, 2013 8:57
Dean: Love your columns!

You state that 'the facts speak for themselves' that Obama administration has been inept at managing the economy into strong recovery. Alas, facts do NOT speak, we are left with fallible and biased humans to interpret them.

So how do you say it's administration ineptitude vs say, income inequality, congressional hostility to sufficient stimulus, etc.?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.