Understanding the painfully slow jobs recovery
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.