Tag Archives: employment growth

Employment in the Recession: The Problem is Slow GDP Growth, Not Productivity

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I.  Introduction

The recovery in employment has been exceedingly weak in the on-going, but slow, recovery from the 2008 collapse.  The recovery of GDP has been weak as aggregate demand has simply not been there to absorb increased production.  Household consumption has been weak following the collapse of the housing bubble, and monetary policy has been pushed to the limit with Fed interest rates now almost zero but the economy still in a liquidity trap.

The one instrument that could have been used to create demand for output and hence employment would have been increased fiscal expenditures.  But as noted in a March 3 posting on this blog, total government spending (including that from state and local governments) has been flat or falling since Obama was inaugurated.  Indeed, that blog found that if fiscal expenditure had been allowed to grow as fast as it had in the Reagan years following the downturn that began in July 1981, GDP at the end of 2011 would have been close to full employment output.

The oft repeated Republican alternative view, however, is that the slow recovery in GDP and jobs has been due to overbearing new regulations, and not due to fiscal drag or some other demand side issue.  Indeed, Republicans have argued strongly that government expenditures should be cut even further.  They have asserted that the recovery in jobs has been weak due to expensive and excessive new regulations instituted by the Obama administration, which have deterred businesses from creating jobs.  While more than a bit confused, as we will see below, the argument is that these new regulations have hurt productivity, so businessmen could not profitably employ new workers and hence did not hire new workers.

A convenient summary of this view appeared today in the Washington Post, in the “Right Turn” column of the conservative columnist/blogger Jennifer Rubin (link here to the on-line version).  She wrote:  “Get Obama out of the way — and with him Obamacare, the Dodd-Frank legislation, a chunk of discretionary spending and the planned tax hikes — and instead put in place his agenda — tax cuts, entitlement reform, reduced regulation, and domestic energy development — and the economy will take off.”  The argument falls apart if these measures, and the rest of what has been done during Obama’s period in office, did not result in a collapse in productivity.

This blog will look at whether there is any factual support for this Republican alternative view on the cause of the slow recovery in employment.  Did productivity go down after Obama took office?  What path has productivity taken over the course of this downturn, and how does this compare to the paths taken in previous downturns?  And in reviewing this, we will examine the confusion in this argument on the links between productivity and job growth.

II.  GDP and Employment Growth in the Downturns

To start, it is helpful to see what the paths of GDP and employment have been in this downturn, and in comparison to previous downturns.  The path of real GDP was shown in the March 3 blog cited above, and is repeated here for convenience:

As was noted before, the path of GDP recovery has been especially slow following the 2008 financial collapse.  GDP fell sharply in the first five quarters of the downturn, in the last year of the Bush presidency and into the quarter that Obama was inaugurated (the first quarter of 2009).  GDP stabilized soon after Obama took office and then started to grow, but has since grown only slowly.  The recovery has been the weakest of any among the six recessions in the US of the last four decades.  The earlier blog noted that this can be explained by weak demand for output, due to government spending that has been flat or falling since Obama took office, and exacerbated by the collapse of the housing market.

With the weak growth of GDP, it should not be surprising that employment growth in this weak recovery has been exceptionally weak as well:

Employment fell sharply in the year before Obama took office, more than in any of the other downturns of the last forty years.  And then, despite the stabilization of GDP, employment continued to fall through 2009 before stabilizing.  But the recovery in employment since then has been poor.  This employment path has been by far the weakest of any of the six downturns of the last forty years.

III.  Labor Productivity in the Downturns

Can this weak recovery in employment in the current downturn be explained by poor productivity growth (a result of excessive regulation), as the Republican argument asserts? Has the path of labor productivity also been an outlier in the current downturn?

Actually, the path of labor productivity has been well within the paths seen in the other downturns:

Labor productivity did in fact fall at first, during the last year of the Bush presidency, although this was not uncommon among the downturns.  The fall while Bush was still president was relatively high, but similar to the downturns seen after November 1973 (Nixon/Ford) and July 1981 (Reagan).

But it is interesting to note that labor productivity began to rise quite rapidly immediately after Obama took office.  I would not argue that this was entirely due to Obama, especially in the first few months of his term.  I am merely pointing out that there is no basis for the assertion that Obama instigated regulations hurt productivity and hence job growth (under the Republican argument) after he took office.

This becomes even more clear if one re-bases the series so that labor productivity in the fifth quarter after the start of a downturn is set equal to 100:

Starting from when Obama took office (in the fifth quarter after the start of the downturn), labor productivity growth has been high, and indeed grew at about the same rate as that seen following the 1981 downturn (during the Reagan presidency).  Productivity growth during these two recoveries were not only similar but also the most rapid by a significant margin among the six downturns tracked.  The main difference between the two is that productivity growth has slowed in the current cycle over roughly the last year (i.e. starting in quarter 13), while it continued to grow at that point in the recovery from the downturn that began in July 1981.  But the difference is not large, and one should not draw strong conclusions from it.

It is a firmly held position in Republican dogma that the “reforms” instituted by Reagan of deregulation, cuts in taxes, undermining of labor unions, and other such measures, led to a miracle of productivity growth from which the economy still benefits.  I noted in an earlier posting (see here) that productivity and output growth in the US was in fact slower in the 30 years following Reagan than in the 30 years before.  Over a long term perspective, Reagan was not such a miracle.  And from the diagram above, we see that over the short term, starting from the same point in the business cycle (five quarters after the peak), the record in terms of productivity growth for the vilified Obama is basically the same as for the sanctified Reagan.

It is not a coincidence that the employment picture finally started to improve in 2011, precisely when productivity growth, which had been strong, started to level off.  And this points to the basic confusion in the Republican argument, which some of you may have already seen.  By basic arithmetic, the number of employees one needs to produce a given amount of output depends on productivity, but depends on it negatively.  That is, if productivity has increased, one needs fewer workers to produce a given amount of output.  If one can only sell so much of output due to slack demand, and if productivity growth is strong, then employment growth will be weak.  This has been the story of the recovery during the Obama term, and it is only in the last year, when the pace of productivity improvement slowed, that one has seen a more steady increase in the number of employed.

Productivity growth is due to many factors, and for the economy as a whole it will not change quickly due to any policy action.  It will vary over the course of the business cycle, as seen in the diagrams above, where it will normally (although not necessarily always) fall at the onset of the downturn (as firms will usually be slow to lay off workers as demand for output slows), and then rise significantly once the recovery begins (as firms will usually also be slow to hire additional workers as demand for output increases, but instead use existing workers more).

The current downturn and recovery was not that much different, although the swings were more extreme this time as the downturn was more extreme.  But what was different in the current cycle is that in the recovery (as discussed in the March 3 blog posting), demand from government spending did not increase as it had in previous recoveries, but rather was flat and then fell.  Furthermore, demand from housing construction was extremely depressed, due to the size of the housing bubble and subsequent collapse.  Recovery in GDP, and hence in employment, has therefore been slow.

IV.  Conclusion

There is no factual support for the Republican assertion that overbearing new regulations from the Obama administration has led to weak job growth, due to the negative impact of such regulations on productivity.  Indeed, the argument is quite confused, since for any given level of output, higher (not lower) productivity means fewer workers are needed to produce that output, which hurts immediate job growth.

The path of labor productivity in the current downturn and recovery has in fact been within the bounds seen in other downturns and recoveries in the US over the past four decades.  If anything, productivity fell somewhat more sharply than in most of the others during the last year of the Bush presidency, and more rapidly than most of the others after Obama took office.  And it is this relatively rapid growth of labor productivity during the Obama term, coupled with weak GDP growth (due to fiscal drag and the collapse in housing) which explains the weak recovery in employment.

It should be emphasized that productivity growth is good over the longer term, as it leads to a higher level of output and hence overall income at the full employment level of GDP.  But when the economy is operating at less than full employment GDP, higher productivity will translate into fewer jobs than otherwise.  The way to resolve this is to bring the demand for output back up to the level of output that could be produced if all resources (in particular labor) were fully utilized.  It is a terrible waste, as well as a human tragedy, to allow such unemployment when the needs are so great.

Weekly Initial Claims for Unemployment Insurance: A Good Report, But Not Yet Where It Needs to Be

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Initial claims for unemployment insurance continue to improve, although claims are still somewhat above where they would normally be when the economy is at full employment.  While there is a good deal of noise in the week to week figures, the trend has clearly been an improving one.  But there are concerns that weak US growth, and problems stemming from Europe and elsewhere, could undermine the improvement seen so far.

The data come from this morning’s regular weekly release by the US Department of Labor, and it is helpful to see the figures in the longer term context.  The graph above updates one from my posting of November 20, 2011.  Initial claims for unemployment insurance came to 348,000 in the week ending February 11, far better than the roughly 650,000 per week who were being laid off and filing claims for unemployment insurance when Obama took office.

The initial unemployment claims are still somewhat above, although now fairly close to, the level of around 310,000 to 320,000 per week that one would see when the economy is at close to full employment.  As was discussed in a January 19 posting on this blog on the dynamics of the labor market, there is constant churning in the jobs market, with workers being laid off even when the economy is at full employment.  And as was shown in the second graph in that January 19 posting, layoffs are now close to where they were before the 2008 economic collapse.

But new hires remain (at around 4 million per month) well below where they would be when the economy is operating at full employment (around 5 million per month).  Hence unemployment remains high (8.3%).  Firms have a surfeit of cash in their accounts from very high profits (see posting here), but there is little demand for extra production.  Unfortunately, it is now politically impossible (due to concerted Republican opposition in Congress) for the government to follow the expansionary policy one would need to provide that demand.

So the economy continues to grow, but slowly.  Hence the employment situation has continued to improve, but only slowly.  And there are concerns that the on-going recovery in 2012 remains fragile.  As was noted in a January 27 post, US growth in the fourth quarter of 2011 was largely due to a large increase in inventories.  This is unlikely to continue, and even if inventory growth increases again as much as it did in the fourth quarter (with all else growing as it did in the fourth quarter, although these will of course change), GDP growth would come to only 0.8% at an annual rate.

There are also major concerns arising from Europe.  Europe has been following deliberate austerity policies, and consequently is likely now in recession.  It was announced yesterday that GDP fell in the EU as a whole at a 1.2% annualized rate in the fourth quarter (0.3% at a quarterly rate).  The normal criterion for a recession is for two quarters of such negative growth.  The Greek crisis is also not resolved, and could get much worse.  And there are other global concerns as well, such as the risk that tensions with Iran could escalate and lead to an attempt to close of the Straits of Hormuz, and cause oil prices to skyrocket.

So while the labor market has improved, there are concerns on whether this can be sustained.

Employment Growth in January: Better, but Sustainability is a Concern

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The employment report for January, released this morning by the Bureau of Labor Statistics, is a positive report.  But while employment growth is now improving, it is still not rapid enough, and its sustainability is a concern.

As I had noted in a posting on December 5 in this blog, monthly employment growth in the US needs to be in a range of roughly 200 to 250,000 per month for unemployment to fall on a sustainable basis.  One is now starting to see that, with overall employment growth of 203,000 in December and 243,000 in January.  With such growth, the unemployment rate fell from 8.9% in October to 8.7% in November to 8.5% in December and to 8.3% in January.  This is certainly welcome.  But unemployment at 8.3% is still far too high.  In a more robust recovery, one would be seeing monthly employment growth figures of over 300,000.

And the overall employment figures are still being held back by falling employment in government (mostly state and local government, which accounts for 87% of government employment in the US, but there have also been falls in federal employment).  In January, total government employment fell by 14,000, thus partly offsetting the rise in private employment of 257,000, to produce the overall gain of 243,000.

For the past year (January 2011 to January 2012), government employment fell by 276,000.  This has been a significant factor in holding down overall employment growth.  And government employment fell by 230,000 in the year before that (January 2010 to January 2011), and fell by 97,000 in the year before that (January 2009, when Obama was inaugurated, to January 2010), for a total fall in government employment of 603,000 over the three years.  In the three years before Obama took office, government employment rose by 248,000 in 2006, rose by 281,000 in 2007, and rose by 200,000 in 2008, for a total increase of 729,000.

Yet Obama has been repeatedly accused of creating an explosion of government.  (For a more detailed review of what has happened to Federal Government employment alone, see this blog.)  Had total government employment risen by 600,000 rather than fallen by 600,000 since Obama took office, one would have had an extra 1.2 million jobs directly.  Even ignoring any multiplier impact, this by itself would have led to an unemployment rate now of 7.5% rather than 8.3%.  And assuming, conservatively, a multiplier of just two (so that one additional government job leads to one additional private job, to supply the goods to cover the increased personal spending of the now employed government workers), the unemployment rate would now be a more respectable 6.7%.

While the January employment report was positive, one should keep in mind that there are threats on the horizon.  Two to consider:

1)  As noted in a January 27 blog, GDP growth in the fourth quarter of 2011 was only 2.8%, and 70% of this came from the change in the change in private inventories.  Without this inventory change, GDP would have grown by just 0.8%.  For the first quarter of 2012, it is unlikely that private inventories will again go up by so much.  And note that because it is the change in the change in private inventories that is the contribution to GDP growth (see this blog), then should private inventories once again increase by as much as they did in the fourth quarter of 2011, the growth in GDP in the current quarter would only be 0.8% (everything else being equal as in the fourth quarter of 2011, which of course it won’t be).  That is, inventories would have to continue to rise by as much as they did in the fourth quarter of 2011 simply to keep GDP growth at 0.8%.  They are likely to rise by far less, and quite possibly might fall if the high level of inventory accumulation in late 2011 was more than suppliers wanted.  This could then significantly hold back production and GDP growth, and hence employment growth, over the next several months.

2)  Europe continues to be problematic, with the focus on policies (fiscal austerity) which will make the situation worse rather than better.  Europe will certainly be in recession in 2012, and probably already is, and this will hurt the US recovery.

And there are of course other risks, such as, for example, an escalation in tensions with Iran leading to disruption of shipping through the Strait of Hormuz, that could cause oil prices to skyrocket.  There are many such scenarios that one can imagine, so a US recovery is anything but certain.  So while the January employment report was a positive one, there are still reasons to be concerned.