Has Structural Change Contributed to a Jobless Recovery?

The Federal Reserve Bank of New York ^ | 08/25/2003 08:08:56 | Erica L. Groshen and Simon Potter

[Brellium]

The current recovery has seen steady growth in output but no corresponding rise in employment. A look at layoff trends and industry job gains and losses in 2001-03 suggests that structural change—the permanent relocation of workers from some industries to others—may help explain the stalled growth in jobs.

A surge in payroll jobs used to be a reliable sign of the end of a recession—but not any longer. When the National Bureau of Economic Research (NBER), the accepted arbiter of business cycle dating, recently designated November 2001 as the end of the nation’s latest recession, it based its decision largely on the growth of output (GDP).1 By the end of June 2003, GDP had risen 4.5 percent from its low in the third quarter of 2001 and significantly exceeded its pre-recession peak. While the members of the Bureau’s dating committee saw the strong growth of this indicator as persuasive evidence that the downturn was over, they acknowledged that their decision was made very difficult by the “divergent behavior of employment.” What troubled the committee was that payroll employment, which would normally rise in tandem with output, had shown no sign of recovery. Indeed, the payroll numbers fell almost 0.4 percent in 2002 and another 0.3 percent through July 2003.

In this edition of Current Issues, we explore why the recovery from the most recent recession has brought no growth in jobs. We advance the hypothesis that structural changes—permanent shifts in the distribution of workers throughout the economy—have contributed significantly to the sluggishness in the job market.

We find evidence of structural change in two features of the 2001 recession: the predominance of permanent job losses over temporary layoffs and the relocation of jobs from one industry to another. The data suggest that most of the jobs added during the recovery have been new positions in different firms and industries, not rehires. In our view, this shift to new jobs largely explains why the payroll numbers have been so slow to rise: Creating jobs takes longer than recalling workers to their old positions and is riskier in the current uncertain environment.

A Second Jobless Recovery The NBER’s choice of November 2001 as the end, or “trough,” of the recession that began in March 2001 means that the United States has been in a recovery for roughly twenty months. The trough marks not only the lowest point of economic activity but also the beginning of the expansion or rising phase of the business cycle.

Although the weak performance of the labor market during the current recovery has been surprising, it is not without precedent. The period following the 1990-91 recession was dubbed the “jobless recovery” because the economy added so few jobs during the first year and a half after the expansion began.

The current recovery parallels this earlier recovery in important respects. In 1991-92, output growth rose fairly steadily, but job growth remained near zero for more than a year. In 2002-03, real (inflation-adjusted) GDP has grown each quarter at annualized rates between 1.3 and 5.0 percent, while payroll growth averaged -0.4 percent at an annualized rate through July.2

The sluggishness of payroll growth during the 1991-92 and current recoveries stands in sharp contrast to the vigorous rebound in employment during earlier recoveries (Chart 1). To be sure, these earlier recoveries had rocky moments, with occasional jobless intervals. At the start of any recovery, many employers will delay hires or recalls for a time to be certain that the increase in demand will continue. Nevertheless, although the job market resurgence in the past may often have lagged the output recovery by one quarter, only during the two most recent recoveries has the divergence between job and output growth persisted for a longer period.3

The divergent paths of output and employment in 1991-92 and 2002-03 suggest the emergence of a new kind of recovery, one driven mostly by productivity increases rather than payroll gains. The fact that no influx of new workers occurred in the two most recent recoveries means that output grew because workers were producing more. Although one might speculate that output increased because workers were putting in longer days, average hours worked by employees actually changed little during this and the previous jobless recovery.

The parallels between the two most recent recoveries raise hopes that the current recovery will ultimately follow the same course as its predecessor. After about eighteen months, the 1991-92 recovery ushered in very strong employment growth and the longest economic expansion of the postwar period. But while we cannot know when—or how vigorously—job growth will revive during this recovery, we can explore why the recovery is jobless now

[Brellium]

Sorry, but this is a tad long to paste as a full article. Besides that there are a number of graphs and such to go along with it.

[RLK]

When you have increasing proportions of people out of work, there is no recovry. All the rest of the explanations are B. S.

[Uncle Miltie]

I propose an alternate explanation. Tremendous quantities of very effective software were sold in the late 1990s and 2000 and 2001. The labor efficiencies are kicking in now. There is lots more growth possible before the currently employed labor pool is working to full capacity.

I see this effect and measure it in my job. I know of many companies that can accomplish twice as much work with the same level of staff. That staff is not yet fully busy (they were not laid off, though they could have been). I think it could take another year or two of 3-4% growth before the "labor capacity" is used up, and new hires are required for the load of business.

That's my theory, and I'm sticking to it.

[Luke Skyfreeper]

Hey, at least you have a reason for excerpting. 8-)

[caisson71]

I wonder what the effect of extending unemployment benefits is having on the employment numbers. I suspect workers may be waiting for benefits to run out before looking for work.

[dalebert]

Is the jobless rate really as bad as the press says it is?

[livius]

Based on my totally inexpert opinion, which in turn is based on observation, I think it's a bit of both. I think economies have been made, but I also think that shifts are occurring in various industries.

In addition, there is a generational shift in progress right now. Some of the older boomers have retired (if they were successful) or been laid off (if they were not), but in any case, are doing other things. Fewer and fewer people go directly to retirement; many of them, where I live at least, seem to be opening their own businesses. Give it a few years, and I suspect that a whole crop of small businesses will not only be making money for their owners, but hiring like mad.

The question is whether there will be a qualified young workforce ready to take these jobs. That is what I see as a greater problem, in the long run.

[TopDog2]

A look at layoff trends and industry job gains and losses in 2001-03 suggests that structural change—the permanent relocation of workers from some industries to others—may help explain the stalled growth in jobs.

No. It's the permanent relocation of workers from the United States to other countries that "may help explain the stalled growth in jobs."

[Luke Skyfreeper]

In a nutshell (my paraphrasing):

"You're not going to get the damn job back. This isn't just the traditional end of a business cycle, it's a structural shift. The job you had a few years ago is probably gone for good. Find out what people are hiring, what people want, and either get trained for something new, or go into business for yourself, if you can succeed at that."

"Recoveries in jobs take time, especially when the job market has shifted like this and a return to stronger employment requires the creation of totally new jobs. Nonetheless, improving economic conditions and a general settling of the dust will eventually result in improvement of the job market again. Just don't expect them to be the same jobs as before."

"Things in general are not as bad as they are in some quarters, and they're probably going to improve."

[Luke Skyfreeper]

Give it a few years, and I suspect that a whole crop of small businesses will not only be making money for their owners, but hiring like mad.

Small businesses are generally where jobs are created.

[q_an_a]

In addition many people that ten years ago had no computer experience now are able to pick up new programs with far less training. Futher, training people are not as necessary on the staff of a business, because users have the basic skills and look for application help not fundamental training.

[inPhase]

Agree re: your comments on small biz,

but there is a specific problem for small biz in the loss of jobs in "manufacturing".

The huge increase in DOD spending cut out small biz.

Gov sector did this consciously and willingly, saying that Small Biz Innovation Research (SBIR) contracts were enough to sustain small biz in the R&D federal marketplace.

The entire SBIR program is smaller than many 8A "set aside to minorities" individual contracts.

Yet to "win" even an SBIR award, small companies have to bring in government agencies and or .edu's to share the money with,

outside of the legislative process.

Add to this that mega SAIC calls itself a small biz and politically grabs these contracts with a wink and nod from congress (really!),

and that Lockheed has wink nod subsidiaries too who are SBIR mills,

how can small biz survive in the really big dollar federal manufacturing sector driven by small biz R&D.

A huge dollar effort that was going to the small biz high tech. manufacturing section is gone (Eagle publishing has the solid montonically decreasing numbers done for SBA.) When e.g. MDA (BMDO) decided that competition was not needed for their success, nor testing by the way, be gone also all independent oversight,

many small biz were dropped quickly by Primes -- to the tune of the per cent required by law for small biz,

and big biz gets a bonus for giving contracts to the unqualified, soon to be qualified -- anyway 8A set asides.

Trickle down works if you don't plug it up and

then let the small biz compete, which used to be the case.

[lelio]

I know of many companies that can accomplish twice as much work with the same level of staff.

While that's definately true, where's all the money that they are saving with lowered staff costs? Perhaps they aren't making as much money as before as less people are buying their goods. Or they're demanding you cut your profit in half as they can get the product for much cheaper from China.

I think the difference between the constructive destruction that you're talking about is that it worked in the 80's as the jobs stayed in this country. Now the jobs destroyed are being re-created overseas.

And for as much as Walter Williams likes to repeat the opposite: dollars sent over to China aren't as helpful to the economy as ones spent here.