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.