Falling Into the Gap: The Economic Recovery and Labor Market

The economy is like a patient with a recurring health condition. During this current economic recovery, total economic output grew while jobs disappeared in the “job loss” recovery. The economy experienced a much weaker and much more short-lived version of this condition in the early 1990s, when employment growth was uncharacteristically slow in the recovery and unemployment continued to rise for 18 months after the recession ended.

Characterizing the symptoms of this illness is only the first and admittedly easiest step; identifying the causes and cures are considerably more difficult. Yet workers cannot wait until the causes are identified. They need treatments for the symptoms now.

The term “job loss” recovery says it all. For the past two years the economy grew, while workers waited for the labor market to generate good new jobs. Since the recession ended, employers have eliminated 846,000 private sector jobs. Meanwhile average hourly wages for those who remain employed have risen by only 17 cents in the past two years (inflation adjusted).

Historically, recessions and labor markets were not always so out of sync= During the severe recession of the early 1980s the labor market snapped back almost immediately after the recession ended. Two months after the recession was over employment had grown beyond its recessionary low.

Two possible explanations for the divergence in overall economic growth and employment have emerged, neither of which is wholly satisfying. The first is that productivity has increased so rapidly that firms do not need to hire new workers to fill orders. A second is that demand by consumers and firms did not decline sharply during the recession – eliminating what was once the post-recession boomlet.

Productivity has been high, but not excessively so. During the early stages of past recoveries, productivity grew at an average rate of 3.9 percent. In comparison, during the “jobless” and the “job loss” recoveries, productivity grew at 4.3 percent. Further, many analysts argue that the productivity gains in the service sector are overstated, making productivity growth even less important as an explanation for the “job loss” recovery.

It also seems unlikely that demand, at least by consumers, could have been stronger without solid income growth. Consumer demand never really slowed during this recession. Low interest rates fueled home refinancing, freeing up additional monies, which households spent on increasingly expensive items, e.g. education and health care.

Thus, this recovery has been characterized by neither atypically high productivity nor low consumer demand. However, investment demand by businesses was comparatively low due to large overcapacities.

Some may blame policies pursued during this recession for the lack in investment. Fiscal policy has not been as efficient as it could have been in raising incomes, and thus, consumption or investment. The Bush administration failed to enact the kinds of policies that would have spurred demand most. Too few of the tax cuts were targeted to households with either slow income growth or high proportions of their budgets devoted to necessities, as is the case with most low income families. Had fiscal policies been more effective, demand would have been higher, overcapacities would have shrunk, and investment would have increased.

Another possibility is that changes in corporate behavior may be responsible for the “job loss” recovery. Accounting scandals may have induced firms to seek higher short-term profits than in the past to satisfy jittery shareholders spooked by corporate scandals. Thus, firms delayed new hires and investments as long as possible to boost their quarterly bottom lines.

There is no ready answer for why there is a gap between output and employment, or why it has grown from a milder “jobless” to a more painful “job loss” recovery. Although two bad recoveries do not create a trend, it is too costly for workers to wait for a third one without adequate preparations. Moreover, households need help from policymakers now to deal with the results of the “job loss” recovery since it has led to record debt burdens for households.

An easy way to prepare for the future and to deal with the current pain would be to spend more money in making sure that workers who could not find jobs would have a means of income support. This could be accomplished through extension of unemployment benefits, especially since long-term unemployment remains near record highs. In fact, Congress recently took a pass on extending benefits. Rather than wait for Congressional action to extend benefits, better triggers for longer unemployment benefits could be set, which would extend benefits automatically, when the labor market is weak.

Additionally, policymakers should consider measures to give firms incentives to increase hiring sooner. Such measures could include tax credits for hiring or a short-term suspension of payroll taxes. In particular, a tax credit for creating more good-paying part-time jobs would be made available. These short-term tax credits would only be available to firms that offered their part-time workers pro rata benefits. Offering these types of jobs would lead many men and women with high skills back into the labor force while providing them a mechanism for balancing work and family obligations.

Researchers may take their time to study the symptoms of the “jobless” and “job loss” recoveries. But continuing without preparations for a possible third such recovery seems costly to workers and the economy. And right now, workers who are facing record debt burdens cannot wait for their answers, either. While our patient slowly recovers, policymakers should consider measures to improve the incomes of households who carried the economy through the recession with their willingness to incur enormous debts and maintain our economy with their record consumption levels. Until the causes of the “job loss” recovery are fully understood, households and the economy will need an effective treatment of the symptoms in order to stabilize this recovery.

  • Annualized Average Quarterly Productivity Growth during First Seven Quarters of Recovery
    Although productivity growth during this recovery has been stronger than in previous recoveries, it is not strong enough to explain the first job loss recovery since WWII. The average annualized quarterly productivity growth rate for the first seven quarters of the recovery was 5.0% for this recovery, close to the 4.9% for the recovery in the early 1960s and less than the 5.2% of the recovery in the early 1950s.
    Source: Bureau of Labor Statistics, Output per Hour, and author’s calculations.
  • Real Consumption Growth in Recessions and Recoveries
    Consumption remained surprisingly steady in this recession compared to earlier recession. While in earlier recessions inflation adjusted recessions declined at an average annualized rate of 0.9%, it increased by 2.8% in this recession. Hence, there was no consumption acceleration because their was no pent-up demand. In the first 22 months of previous recoveries, inflation adjusted consumption grew at an average annualized rate of 4.9%, whereas it increased at only 2.8% in this recovery.
    Sources: Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers; Bureau of Economic Affairs, Personal Income; and author’s calculations.

Jeffrey Wenger is an assistant professor at the University of Georgia.