Productivity, Unemployment, and the End of the Recession-Becker

On October 7, 2008 I wrote an op-ed piece for the Wall Street Journal ("We're Not Headed for a Depression") in which I said there would not be a depression, certainly nothing at all resembling the Great Depression of the 1930s. As the economy continued to decline after that I began to worry that my predictions were going to look foolish, and become famous as one of the many absurdly bad forecasts. Fortunately for me, and even more so for the world, the forecast turned out to be basically correct. I recently claimed in a post on this blog on August 9th that the current world recession is over, and many economists and official organizations since then have come to the same conclusion. The recession was big and world wide, but it was far from a depression-a rule of thumb is that a contraction is a depression only if the fall in output is at least 10%. The output fall in the US and the world has been less than 5%. Indeed, this recession is hardly more severe in the US- the epicenter of the financial crisis - than a couple of previous recessions, such as the one from 1973-75 brought on by the first oil shock, and the one in 1981-83 resulting from the Fed's successful efforts to squeeze inflation out of the system. During the Great Depression American unemployment peaked at 25% and was high during the whole of the 1930s, while output declined by more than 20%. During this present (or past) recession, output has fallen by a little over 4%, and unemployment so far has remained under 10%-the latest figure gives an unemployment rate of 9.7%. Since a world of difference exists between the two events, the prevalent fear of a major depression was never realized. Those who are more pessimistic about this recession point out that unemployment is still rising, and may reach a much higher level than its present rate. They also rightly indicate that total unemployment and underemployment is much higher than 9.7% because some persons have only found part time jobs, while others have been so discouraged by the weak labor market that they quit looking for work, and so are not counted as unemployed. I will take up both aspects of this pessimism in turn. To understand what has been happening to unemployment, it is crucial to recognize that employment has declined, and unemployment has risen, much more relative to output during this recession than in past recessions because labor productivity-measured by output per worker or per hour of employment- has continued to grow during the recession. Productivity grew by 0.3% during the first quarter of 2009, and by a whopping 1.8% during the second quarter. Typically, measured productivity falls during serious recessions because of excess capacity of capital and the many employed workers who are underutilized. Basic arithmetic indicates that for any given fall in output, the greater the rise in measured labor productivity, the greater the fall in employment, and the greater the increase in unemployment. Unemployment is typically a lagging indicator in the sense that it usually begins to fall only months after output has started to increase again. Since I expect output to rise only a little in the US during the third quarter that will be over at the end of September, unemployment should continue to rise for a while, almost certainly surpassing 10% at its peak. However, if, as I expect, the growth in productivity will continue into the future at a good pace because of the many innovations and inventions coming on line, that will lead to greater, not a lesser, growth in employment. For at some point, the economics of the positive relation between productivity and employment becomes more powerful than the short-term arithmetic negative relation that occurs during recessions. In the longer run, advances in productivity are partly produced by investments in R&D and other innovations that generate new products and new processes. Both new products and new production methods typically require investments in both physical and human capital. They also stimulate the use of more workers of various skills that utilize the greater capital stock. This is why over longer time periods, productivity advances and robust labor and capital markets in different economies are strongly positively, not negatively, related. For this reason, the continuing advances in productivity in the US and elsewhere will at first limit and then reverse the falls in employment and rises in unemployment. It is true that the total underemployment rate during this recession would be well above the official unemployment rate of 9.7%. Some estimates put total underemployment at over 16%, which includes individuals who are reluctantly working only part-time, and also persons who have given up looking for work. However, apples have to be compared with apples, and in judging this recession relative to prior ones, the same calculations have to be made for these past recessions as well. Exactly the same type of growth in underemployment was operating in these prior recessions, and especially for the severe recession of the 1930s. Perhaps the fractions of reluctant part timers and persons who stopped looking for work are greater during the present recession than recessions than say in 1973-75, or 1981-83, but I have not seen any demonstration of this. My guess is that whatever differences exist, they are not enough to reverse the ordering of the severity of different post-war recessions. My overall conclusion is that productivity advances will lead the world out of the recession, and after a while toward a decent rate of growth in world GDP. These advances will occur even if the financial sector is not fully recovered from its crisis. As productivity advances continue at robust levels, that will stimulate the demand for labor, and begin to reduce unemployment and produce sizable rates of growth in employment.

Comments

[Anonymous]

Your model does not include credit, and is therefore an irrelevant simplification of the real world. Credit is money, despite the best efforts of your assumptions to assert otherwise.

[Anonymous]

I agree that from a pure economic indicator, the recession is over. But a double dip is sure to follow sometime next year. The rise in foreclosures and the lack of a credit fairy will stall any REAL output. Companies will not replace workers for some time due to their over capacity from a purely credit driven bubble spanning the past decade if not longer. People may need to upgrade their computers but they won't need one for each room or office desk and the era of the two cars in the driveway will drop down to two bicycle's from free cycle.

[Anonymous]

Imagine how slight this recession could have been had politicians not been so quick to sacrifice human prosperity on the altar of environmentalism.

[Anonymous]

"I will not sign a plan that adds one dime to our deficits either now or in the future. Period." Obama

I thought deficit spending was economic stimulus...?

[Anonymous]

The double-dip comes when taxes go up. Just think kiddies... taxes haven't even gone up yet.... the fun hasn't even started yet.

Enjoy a year of artificial wealth while you can. It feels great - it is just that unemployment is 9.7% and rising.

Inflation + Taxation = STAGFLATION

[Anonymous]

Professor Becker,

With all due respect, we are nowhere near out of the woods yet. Some data points to consider:

U-6 unemployment for August was 16.5%

Consumer Credit contracted by $21.6 billion in July (10% annualized)

4-5 banks are closing every week and amazingly when they are seized, the examiners are finding the carrying value of many assets 30 to 40% too high (and the FDIC is nearly out of money)

Over 5% of Prime residential mortgages are now either delinquent or in default (second quarter)

Bank loan charge-offs have crossed 2% and possibly 3% in the near future

Cure rates on residential mortgages (delinquent borrowers bringing themselves current) is 6% when just two years ago it was 45%

Distressed housing sales make up 31% of the market

Year-on-year factory orders are off 23%

By virtue of asset backings, agencies purchases and FHA loan programs (The amount of loans the FHA now insures has grown to $560 billion) the government is responsible for 90% of the residential mortgage market

FHA is making loans to borrowers at 97% loan to value and Fannie and Freddie are guaranteeing loans that have loan to values of 125%

Per capita income/debt is the highest its been; ever

The treasuries is issuing 70 billion in securities over the coming months just as the Fed will no longer sop up the extra duration coming into the system: MBS securities already marked at insanely high valuations are now going to worth even less

The commercial real estate market is imploding and their corresponding derivative asset values are melting on bank books

Banks still retain nearly a trillion dollars in "toxic assets" that have not been marked to par and are being classified as "held to maturity." Their valuations are not borderline criminal; they are

Maiden Lane and the other legacy assets (1 trillion +) are crushing the Fed's balance sheet. Their solvency and ability to buy treasuries almost entirely predicates on their paying of interest on "excess reserves." Save a printing press, the Fed is insolvent

Without explicit backing of the commercial paper market through TALF and the other host of short term lending guarantees, there is no short term paper market

*****

How much longer can we perpetuate this consumer debt bubble, the Fed's inflationary measures and the fiscal irresponsibility before investors and nations stop borrowing from us?

Look at the debt/credit situation and reassess your perspective.

[Anonymous]

This analysis is the "Classic" and oft used analysis of past "Recessions" and "Recessionary Recoveries". This same approach is what led to the current Economic Crisis when all of the "experts"
were caught with their proverbial "pants down" and the collapse rolled through the World's Economies like a wildfire out of control.

Hopefully, it is correct and the Economic Crisis (i.e. wildfire due to systemic volatility) is under control and on the mend. But given the recent past history of the "classical" approaches to Economics, both Micro and Macro and it's recent spectacular failures, I've got my doubts.

"Time to think anew and act anew." - not too mention, developing a more accurate and realistic Economic Model and method of analysis so we don't repeat this debacle. Now or in the future.

[Anonymous]

This is the Classic mode of analysis to explaining "Recession" and "Recessionary Recovery". The problem arises with our developed Economic Models, both Micro and Macro, and modes of analysis. Such that, the current Economic Crisis, is the result of a spectacular failure of that Economic Model and mode of analysis; that burned much as flash-wild fire would, burning through the World's Economies, both Micro and Macro, at an unprecedented speed due to the new and erronously developed systemic volatility that now exists in the Micro/Macro Economic Order. Catching many of the experts with their proverbial "pants down". Aggravating the collapse.

Hopefully, this Classical Method of analysis holds true and this "Recession" is on the road to recovery. But, I have my doubts.

"It's time to think anew and act anew" and develop more accurate Economic Models and Modes of Analysis that accurately reflect the true natue of Economics, Micro and Macro, and allows us to develop the tools necessary to deal with such Economic Crises now and in the future. So that we do not have to patch up such debacles as we now have to with this current Crisis.

[Anonymous]

I´m affraid the financial mess is not resolved. The credit to private sectors is falling. The credit to Government is growing handsomely, at an annual 28%. Crowding out?
Your analysis on productivity is very interesting, and would be truthfull, only if the finances were on the verge of some normality; They were not. I´m affraid that there will be a second fall, because the banks are plenty of bad assets, whereas the Government will monopolised the financial ressources.

[Anonymous]

Productivity is increasing because the are fewer employees doing the same work. Wait until revenues fall further and you will see productivity fall once again.

The "rescession" may be coming to an end but so what? The United States is in deep and permanent trouble. The birth rate is barely at replacement, the dollar is losing it's value and it's reserve status. Protectionism is rearing it's ugly head which under direction from unions will lead to overwhelming inflation. 50% of the population is supporting the other 50%. Social Security is a giant Ponzi scheme (maybe that is where Madoff got his ideas), Medicare, Medicaid and the feds in general are broke but continuing to print, borrow and spend. Our creditors are getting nervous and looking to other reserve currencies and debt instruments.

I am so glad that the "recession" is nearly over. Now maybe we will be able to see the reality of falling real wages, a declining living standard and social and political chaos.

Check out Rome in 400 A.D. and France under Louis XVI.

[Anonymous]

Productivity is increasing because the are fewer employees doing the same work. Wait until revenues fall further and you will see productivity fall once again.

[Anonymous]

We are not out of the woods yet. The GDP figures are merely a proxy for employment, and are a rather weak proxy at that. When our nation reduces imports, GDP rises; is this a measure of gains to employees? When the government spends more money, GDP rises. In short, the proxy has been stimulated, but it's not real. Doctor says, you have a fever. I know exactly how to fix that. Doc sticks thermometer in a water bath, checks reading. Ah! Problem solved!

Unemployment is still rising. Those who are employed have taken pay cuts. My employer stopped 401k matching; issued no bonuses and no raises this year. My son in law has had two unpaid weeks this year. Many other firms are doing the same. People are effectively taking 10% pay cuts. These are not recorded in the statistics. Federal revenues will be down for 2009, you can bank on it. Other comments have tilled this ground thoroughly - in short, we still have major issues.

There is a rising appreciation on Main Street of the Austrian School of economics. Since the Federal Reserve - as reported by Huffington Post - has basically rented the entire economics profession, this school is little known among academia, but it might be real smart to dust off your Mises, Hayek, and Rothboard, and grab a copy of Woods' Meltdown.

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It looks very bad for the United States because the employment growth is now -0.27%.

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