Rethinking The Jobless Recovery

Progress on job creation is very slow. Between the arrivals of data points, economists are wondering whether higher unemployment will be self-correcting or permanent. Two researchers at the Cleveland Federal Reserve have an encouraging, if tentative, forecast.

As a reminder of how severe the recession was, and continues to be, on American workers, this graph shows total employment since 1970, highlighting the number of months needed after recessions to return to the prior peak in jobs.

Click to enlarge
In the 1990 and 2001 recessions, about two million jobs were lost; this time around it's more like nine million, not taking into account the extensive phenomenon of "layoff to part-time." If the job market needed three years to replace two million positions in the earlier slowdowns, what will be required to fill nine million?

In this week's The New Yorker, James Surowiecki points us to a study by two economists at the Cleveland Fed, Murat Tasci and John Lindner. They look at the frightening question of whether the job market in the U.S. has changed structurally -- have jobs in certain industries disappeared permanently?

We'll get to the experts and their numbers in a minute, but thinking it through, how could there be such sudden shifts in the need for workers that millions of jobs are gone forever? Some of the losses are cyclical, such as in construction, where something like a million fewer people are employed. At some point the economy will need new homes and buildings, but that still seems a ways off. (On Tuesday, The New York Times told us that people moving in with family has reached the highest proportion in 40 years.)

One argument on job losses, though, is that in the last expansion, some businesses hired too many people, and in the downturn realized they could get along with fewer people. If it's simply a question of volume, then those jobs should return when the economy recovers. Since job losses have been lost in many industries, and in many regions, maybe this is what's going on, and an upswing in the business cycle will bring things back.

The cyclical argument is much more pessimistic, however. As Surowiecki posits:

[I]t fits our sense that there's a price to be paid for the excesses of the past decade; that the U.S. economy was profoundly out of whack before the recession hit; and that we need major changes in the kind of work people do.

But with careful analysis, Tasci and Lindner show us that this has happened in past recessions too. This graph won't make any sense if you don't read their article, but if you like graphs you've got to love this one:

They conclude:

One potential reason for this could be that even though some unemployed workers start filling the available job openings, workers who had left the labor force might get encouraged by the recovery and start looking for a job, thereby keeping the unemployment high. While the Census may have skewed the data for this recovery, the path of the curve going forward looks poised to follow in the footsteps of previous recessionary periods. Firm conclusions will only be able to be drawn as more data are generated.

I agree with his conclusion, that we've been jobless far too long, and that it can't be ignored that jobs were lost because of low demand and investment:

Dealing with that is the place to start if we want to do something about unemployment. The structural argument makes government action seem irrelevant. But if we don't do more to get the economy back up to speed, it won't be because stimulating demand won't work. It will be because we've chosen not to do it.