The latest jobs report on Friday confirmed that this is by far the slowest US recovery from a recession in employment as well as income since the end of World War II. Four years after the start of the recession in 2008, American unemployment is still above 8% compared to lower than 5% in 2007. The severity of the financial crisis implies that this would be a steep recession, but a continuation of the recession for 4 years suggests that other factors have also been in play.
Before addressing these factors, it is important to recognize the seriousness of the unemployment figures, aside from the high rate. The great majority of workers can pretty well handle, both psychologically and financially, short spells of unemployment because they can consume out of past savings, they can borrow on credit cards and from relatives, and they can spend their unemployment compensation. Far more difficult to adjust to is long-term unemployment since financial resources get exhausted, skills depreciate, and there is a heavy psychological burden of not working, and not knowing when, if ever, good jobs will become available. Unfortunately, this American recession has high levels of persistent long-term unemployment: about 29% of all the currently unemployed have been out of work for over a year, and 40% have been without work for 6 months or longer. These depressing figures do not even count the large numbers of unemployed who gave up looking for work and left the labor force, or the many workers who are working part time at jobs with much lower hourly wages than they had before the recession.
The newspaper headlines after the jobs report were that only 80,000 jobs were added in June. That is correct, but this number gives a highly misleading picture of the number of new hires. The Job Openings and Labor Turnover Survey (JOLTS) data give monthly aggregate new hires, job separations, and job openings –the latest data are for April 2012. They show aggregate new hires by the American economy in recent months of not 100,000 or so, but over 4 million workers. These numbers are matched by a similar number of job separations that result when workers are fired, laid off, or quit- surprisingly in this weak economy, more than half the total separations are due to workers quitting their jobs. The net difference between hires and separations during the past few months has been only a little more or a little less than 100,000 workers.
Equally important as the hires and separations are the more than 3 million job openings each month, with most of them remaining unfilled. An important puzzle that I do not believe has been resolved is why so many available jobs have not been filled as this recession continues with its high levels of unemployment.
The JOLTS data bring us back again to the question of why the recovery of the American economy has been so slow, with no signs of gathering strength. Contributing to the slow recovery, aside from the severity of the financial crisis, is the crisis in the euro zone brought on by the weak competitive positions of countries like Greece and Italy, and excessive government borrowings by several countries from banks in other countries. The sizable slowdown in the growth rates of China, India, and Brazil has added to the problems of the world economy because these developing countries helped to sustain the growth in world GDP during the first couple of years of the recession.
I believe two other factors are also important (see my blog post “Why has the Recovery in Employment in the US been so Slow?” 5/6/12). One, stressed by Casey Mulligan, is the growth of many means-tested policies during this recession that encourage some workers to leave the labor force or look for part time work so that they can qualify for mortgage and other government-provided benefits. Of course, the government aid eased the burden of unemployment to the families that qualified for the benefits.
The second, and probably more important, factor is the effects of the sharp rise in indexes of economic and policy uncertainty during this recession. Scott Baker, Nicholas Bloom and Steven Davis in a couple of papers not only document this rise in uncertainty, but also show that spikes in the degree of uncertainty experienced during this recession, including the past year, significantly negatively impacts employment for up to two years after the spikes. American households and businesses faced with such large uncertainty tend to be cautious about their investments in consumer and producer durable goods. As a result, American businesses have been reluctant to take on enough additional workers to bring unemployment rates down to more reasonable levels.