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2010 Outlook, Part 3: Reconsidering A Jobless Recovery

Last year the media was full of predictions that the current slowdown would end, like the two before it, in a "jobless recovery." Reports on the labor market for December did not show the progress many had hoped for, but we're nonetheless pretty close to a turning point, where the number job starts to increase again. But what does it mean to have a jobless recovery, and should we be worried about it?

The concept of a jobless recovery doesn't mean much to me, but here is one definition, from a professor's web site:

After a recession, an expansion of real GDP that is not accompanied by a significant expansion of employment. This is possible, for example, if labor productivity expands.
The way I see it, if jobs aren't being created, then the economy is probably not on the mend. What has happened in the U.S. labor market lately is more like a delayed recovery in employment. In post-WWII recessions up to the 1980s, employment started to grow again pretty much on the day the recovery was declared, show in this graph as the right edge of the gray bars:

Employment was flattish for no more than a couple of months after the 1970 and 1982 recessions, but jobs picked up pretty promptly.

Now consider the two most recent recoveries - in each case, employment took longer to come back, and didn't have the bounce of the 1950s and 1980 upturns. But then again, the 1960 and 1970 recoveries were sluggish in creating jobs too.

(After posting this I went back and looked at those recessions again -- in both cases the unemployment rates did not get especially high, seven percent and six percent, respectively, so maybe slower growth in jobs is to be expected in those cases.)

Also consider how many jobs have been lost in this recession - things really fell off a cliff.

In another post, I am going to dig deeper into the speed of the job recovery, but will end this note with thoughts from economists Robert Barbera and Charles Weise, presented in an op-ed in the Financial Times after the December jobs report, titled "Why a job-rich American recovery is still plausible."

The expectation of a jobless recovery, they say, assumes that U.S. employers responded to the 2009 recession by not just letting people go temporarily, but also restructuring their companies such that the reductions in work forces are permanent. They disagree, and contend that the drastic cutbacks were driven more by panic and the simpler need to cut their spending any way they could. Based on the fall in demand, unemployment should only be nine percent, not 10. Further stimulus, they say, would be overdoing it.

This view implies that with enough recovery in the demand for goods and services, the jobs will come back, and that companies will need as many workers as before:

...[T]he recovery in jobs should mirror the restocking of inventories because the collapse in employment and inventories during the recession had the same source in panic-driven cash hoarding. A restoration of unemployment to levels consistent with the decline in output the US economy has experienced would bring the unemployment rate down to around 9 percent. If GDP grows at a 3.8 per cent rate in 2010 - a better-than-consensus forecast but still tame relative to history - the unemployment rate at the end of 2010 could be closer to 8.5 per cent.
This scenario, while wildly optimistic compared with current consensus forecasts, amounts to a weak recovery by historical standards. In the first full year of recovery after the 1981-82 recession, GDP growth was more than 7 per cent. Following the recession of 1974-75, growth was 6 per cent. It is not hard to imagine growth over the next year well in excess of our 3.8 per cent forecast, with jobs growth in the 300,000 per month range. We are not endorsing that as our forecast but we believe it is as likely as the jobless recovery predictions that define the conventional wisdom.
I wonder if their hypothesis still holds after today's report of ongoing (and surprising) weakness in retail sales.