Understanding the painfully slow jobs recovery

By Felix Salmon
May 3, 2013

Today’s jobs report was a solid one, and shows that the recovery, while not exactly strong, is at least not slowing down: Neil Irwin calls it “amazingly consistent”. Whether you look at the past 1 month, 12 months, 24 months, or 36 months, you’ll see the same thing: average payrolls growth of roughly 170,000 jobs per month. That’s not enough to bring unemployment down very quickly, given the natural growth in the workforce. But unemployment is coming down slowly. And at the rate we’re going, at some point in the second half of 2014 we should see total payrolls reach their pre-crisis levels, and the headline unemployment rate hit the key 6.5% level.

There’s a real human cost to the fact that unemployment is coming down so slowly, but there are lots of reasons why it’s very hard to bring it down more quickly. First and foremost, of course, is the fact that US GDP growth is mediocre, coming in at less than 2% per year over the past few years. That’s not the kind of V-shaped recovery which creates jobs. Calculated Risk’s justly-famous jobs chart shows just how bad the recession was for employment, and just how painfully slowly we’re scratching our way back: we’re more than five years into this jobs recession, and we’re still at the worst levels seen in the wake of the dot-com bust.

One of the reasons is the undisputed conclusion of Reinhart and Rogoff: that recoveries from financial crises are much slower than recoveries from other crises. But there’s something bigger going on, too, which Joe Stiglitz writes about today in a very wonky blog post for the IMF.

This is more than just a balance sheet crisis. There is a deeper cause: The United States and Europe are going through a structural transformation. There is a structural transformation associated with the move from manufacturing to a service sector economy. Additionally, changing comparative advantages requires massive adjustments in the structure of the North Atlantic countries.

To put it another way: what looks like a broad economic recovery is actually a combination of many trends, including the end of what turned out to be a very short and weak recovery in manufacturing employment. Here’s Irwin:

The fact that the overall job growth numbers have been extraordinarily stable does not mean there isn’t some real churn going on in the U.S. workforce. In the earliest phase of the recovery, manufacturing jobs was a major driver of job creation, but that turned out to be not a longer-term trend but a partial reversal of the steep declines of the recession. Now, job creation is entirely confined to the services sector: Manufacturing had no net change in employment, construction lost 6,000 jobs, and even mining and logging was a net negative.

Government employment, meanwhile, continued its long swoon… That leaves one sector to drive the train of job creation: private sector services. This particular month, there were strong gains in leisure and hospitality, retail jobs, and professional and business services, and health care has been a mainstay of the expansion.

Stiglitz makes the case that in a recovery with so many moving parts, the single blunt instrument of setting short-term interest rates at the Fed will never be enough, and that “there needs to be close coordination between monetary and fiscal policy.”

What’s more, as Mohamed El-Erian says, policymakers should ideally be able to use job growth not just as a goal, but also as a tool for achieving other ends.

Robust employment growth would – and, let us hope, will – play a critical role in helping the US pivot to a better place… It would do this by maintaining consumption and allowing for a more sustainable savings rate; by countering an excessive upfront fall in public spending that increases the risk of a recession; by enabling the Fed to slowly and gradually normalise monetary policy before it breaks too many things; and by reducing the risk of financial bubbles.

The US economy is a highly complex machine, with many moving parts which ought to be working with each other rather than against each other. Stiglitz makes a strong case that the financial sector broadly is right now part of the problem rather than part of the solution: it’s not directing funding to help the economy grow and create jobs, even as it continues to represent a serious systemic risk. It should go without saying at this point that fiscal policy broadly is part of the problem as well: you don’t create jobs by firing people, and the government should be borrowing if and when the private sector won’t. And as for monetary policy — well, it’s probably too early to tell. It’s done a great job of making people with money richer, but it has had a much less obvious effect on creating jobs for those who want them and don’t have them.

And yet there’s real room for optimism in today’s jobs report. Look at the revised numbers for February: an incredibly heartening 332,000 jobs created, in one short month. Look at the number of people unemployed for 27 weeks or more: that unhappy cohort shrank by 5.6% in April alone, to 4.3 million people. It’s still far too high, but this time last year it was over 5 million, so we’re making a significant dent in what has been the toughest nut to crack.

We can — and should, and could, and must — do better than this. But doing so will require a thaw in the Washington gridlock. When Jack Lew became Treasury secretary, it was understood that the most crucial thing he could deliver would be greater cooperation between the White House, Treasury, and Capitol Hill. That hasn’t happened yet. I hope and trust that he’s been working very hard behind the scenes to make it happen — partly because he doesn’t seem to have achieved anything else, but mainly because it’s by far the most important thing that he could be doing right now. Behind the jobs numbers there are some powerful forces driving real recovery in large parts of the US economy. It’s Lew’s job to work with Congress to identify those forces, and to give them all the support the government can muster.

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Comments
10 comments so far

“recoveries from financial crises are much slower than recoveries from other crises.”

Of course they are.. financial crises are only termed such when they’ve become/been allowed to become sufficiently big; and since they result from malinvestment, and since elites always insist on the sanctity of debt contracts, the aftermath is always one of stagnation, even when you don’t have to deal with issues resulting from unmaintainable specialization into certain forms of wealth production (homes, mostly, as they are most easily made money off of by the FIRE industry)..

Posted by Foppe | Report as abusive

A question to ask: “To what degree did a ‘false buildup’ of jobs/GDP/etc before the crises occur, and to what degree does that make the current cirumstance look worse than it is?”
Talking about when we’ll be back to an employment level consistent with what was still a bubble might might be an assured disappointment.

The other issue of course is that stimulus cannot go on forever, and there is serious honest disagreement about whether it does any lasting good anyway. Which may mean that in reality the economy just has to “tough this out” like a very bad hangover. Not fair at all to the people who weren’t “drunk” – amounts to getting a hangover from someone else’s binge.

Posted by BryanWillman | Report as abusive

“A question to ask: “To what degree did a ‘false buildup’ of jobs/GDP/etc before the crises occur, and to what degree does that make the current cirumstance look worse than it is?”

I’ll never forget reading that in the USA from 2002-’06 the two fastest growing occupations were mortgage bankers and hairdressers.

Want more jobs and GDP growth? Shrink the banking sector. Meredith Whitney in ’08 was saying that it needed to return to where it was in 1998. It hasn’t.

Posted by crocodilechuck | Report as abusive

Over-coming this particular economic crisis is being slowed by the cumulative effects 50-years of actions by each preceding administration has had upon layering their preferred outcomes upon the next economic crisis. You have to overcome the inertia of lies and liars before an economic recovery can even begin anymore. And the next economic crisis will be even worse than the one that came before it. Too bad that things have gotten so out of whack that we are not even ready to talk about lives being lost, or jobs, just the changing nature of work in the disappearing work place.

Posted by theblamee | Report as abusive

I’m still waiting for the “fiscal Clifford” to blow up the economy like Felix promised. Seems we’ve been over that cliff, taken one or two small steps closer to fiscal sustainability, and (surprise!) the economy isn’t any more stagnant than before.

Posted by TFF | Report as abusive

“….from manufacturing to a service sector economy” – and the service sector jobs are not a gateway to middle-class jobs paying $13+ per hour. So we will have an economy based on minimum wage jobs – and that doesn’t sound like progress.

Posted by AZreb | Report as abusive

Of course, there’s also the fact that in both Europe and the USA fiscal policy has been contractionary (note that government employment in the US has fallen almost a million), while monetary policy has been mostly impotent, given the liquidity trap. It’s at least as much cyclical as structural, although the austerians are doing their best to *make* it structural.

Posted by MaysonLancaster | Report as abusive

Housing is directly responsible for over 22% of every domestic job…Despite what the “experts” teel us, housing is not in a real true recovery… currently over 40% of every sale is to investors of REO’s and short sales… not to mention the effect that bulk sales of notes and homes are having on the market… The simple fact is that housing IS NOT in recovery… the price increases are not “real”, with the actions of an uncaring financial sector fueling another bubble… simple fact is that we require a solid stable housing industry to provide the jobs in construction… jobs that do not require technical retraining… This will not, and cannot occur without an effective Mark2Market loan modification plan in place, keeping people in their homes and instilling hope for the future… otherwise wait until 2022 for a stable housing sector…

Posted by GotDOCG | Report as abusive

Housing is directly responsible for over 22% of every domestic job…Despite what the “experts” teel us, housing is not in a real true recovery… currently over 40% of every sale is to investors of REO’s and short sales… not to mention the effect that bulk sales of notes and homes are having on the market… The simple fact is that housing IS NOT in recovery… the price increases are not “real”, with the actions of an uncaring financial sector fueling another bubble… simple fact is that we require a solid stable housing industry to provide the jobs in construction… jobs that do not require technical retraining… This will not, and cannot occur without an effective Mark2Market loan modification plan in place, keeping people in their homes and instilling hope for the future… otherwise wait until 2022 for a stable housing sector…

Posted by GotDOCG | Report as abusive

It is really disappointing to see all this commentary and no mention of 1) China and 2) predatory capitalism. There are two causes of the declining role of employment in our economy: outsourcing to lower wage geographies and a persistent culture of cutting all FTEs from corporations. The Great Recession merely accelerated these trends and legitimated massive cost cutting across all corporations in the US.

There really is no end to these trends. We would need a complete reengineering of the motivations of businesses and governmental policies to even slow down these trends. And note that not a single politician is wlling to tackle either one of these monsters.

Posted by Dollared | Report as abusive
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