Why has the Recovery in Employment in the US been so Slow? Becker

The jobs report from The Bureau of Labor Statistics this past Friday is not good reading. The economy added about 115,000 workers, the slowest increase in 6 months. To make matters worse, over 40% of the unemployed have remained out of work for at least six months. The unemployment rate did drop a notch, but this was because many discouraged workers left the labor force. In fact, the recovery is the slowest in the post World War II period. No single factor explains this slowness, but a combination of several explains most of the slow recovery.

Recoveries after major financial crises are notoriously slow. This is well documented in the book This Time is Different: Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth Rogoff. The authors study many financial crises, and the recoveries from these crises. Recoveries are slow partly because the dire nature of a financial situation is not recognized quickly, and policies that try to end a crisis are usually implemented slowly.

While slow recoveries from major financial crises are common, employment would have increased considerably more rapidly, and unemployment would have fallen much faster, were it not for several factors special to this recovery. Scott Baker, Nicholas Bloom and Steven Davis have studied changes in economic policy uncertainty since 1985, and have constructed an index of the degree of economic policy uncertainty during the past 26 years (see their “Measuring Economic Policy Uncertainty”, October 2011). The index spikes sharply after major events, such as Black Monday’s stock market fall in 1987, the 9/11 attack, and the beginning of the 2^nd Gulf War. Economic policy uncertainty according to their index also rose to extremely high levels during the past several years, especially during the 2010 midterm election, the debate over the stimulus package in 2009, the Lehman bankruptcy and TARP legislation in 2008-9, and the Eurozone crisis and the US debt ceiling disputes in 2011.

These shocks to the degree of uncertainty about the economy and economic policy significantly affected hiring and investments by American businesses. The authors estimate sizable negative effects on employment for up to two years after an increase in the degree of economic policy uncertainty equal to the actual change between 2006 and 2011. Greater uncertainty encourages firms to delay investments in business capital and in new hires. Households faced with a more uncertain economic environment postpone purchasing consumer durables, not only housing but also cars and appliances. Companies and households delay these investments partly because they want to wait to see how the uncertainty is resolved before undertaking potential risky investments. They also wait because greater economic uncertainty raises the cost of capital.

 Heightened uncertainty is inevitable during recessions, especially serious ones. However, some of the uncertainty during this financial crisis was avoidable if Congress and the president had not passed an ineffective stimulus package over a divided Congress, if they had resolved the budget deficit and debt ceiling issues (especially by trying to get entitlements under control), if agreement on tax policy toward broader and flatter taxes had been achieved, and if clearer policies were adopted about which companies would be allowed to go bankrupt and which would be bailed out.

Another force slowing down the recovery in employment was the result of more generous means-tested policies introduced during the recession. My colleague Casey Mulligan discusses these policies and their employment effects in “Do Welfare Policies Matter for Labor Market Aggregates?” (January 2012). He shows that they raised unemployment and reduced employment because they gave perverse incentives on the supply side of the labor market. Many others have also argued that the extension of unemployment compensation to 99 weeks clearly encouraged some of the unemployed to remain unemployed much longer than they would have if unemployment compensation ceased after a year.

Mulligan measures in addition the impact on employment and unemployment of several other policies adopted during the recession. For example, the food stamp program SNAP) was made more generous and more easily available, which enabled additional families to qualify for food stamps by reducing their earnings through remaining unemployed, withdrawing from the labor force, or working part time rather than full time. Policies were introduced to reduce mortgage debt of lower income families.  Mulligan’s calculations suggest that the aggregate effect of all these policy changes on both US employment and unemployment was large because they reduced the supply of men and women who wanted to work, or to work full time.

The literature on financial crises shows that the employment recovery from this recession would likely have been rather slow even with clear and productive government responses. Unfortunately, such responses were not forthcoming. Instead, many of the policies discussed or implemented discouraged both hiring by companies and job seeking by members of the potential labor force through raising the uncertainty about where the American economy was headed. They also reduced employment by creating greater incentives to remain unemployed, or to stay out of the labor force.

Comments

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[NEH]

Recovery in Employment? What Recovery in Employment? It can all be explained in one word, "Fear". Fear in the Financial/Commercial Sector, Fear in the Industrial Sector, Fear in the Agricultural Sector. With the World wide general economic collapse, the World has lost confidence in the future and so the spector of "Fear" has gripped the land. Much like in the Great Depression where employment didn't rebound until until the takeover by the "Military - Industrial" Complex to produce for War. Then the unemployment rate came crashing down.

As in the past, and in every Recession/Depression, the problem has been Confidence vs. Fear. There will be no recovery in Employment until "Confidence" has been restored. As was observed in similiarly dire economic times, "We have nothing to Fear, except the Fear itself"... It has come time to pick up the load, and move it on down the road and in the process, put the Nation back to work.

[TANSTAAFL]

NEH raises a sound point.

Alas, our Nation has changed since FDR said in his 1933 inaugural that "the only thing we have to fear is fear itself." Now government heads up the list of fears that inhibit the private sector from creating jobs.

[Social Security Lawyer]

I agree with the point that uncertainty causes delays in a recovery. That is where the government could be useful, by reassuring the public and providing clear, consistent leadership.

[Phil in Chicago]

Wow. Uncertainty and welfare -- that's all you got? I really expected more from this blog. I will concede that uncertainty must contribute to lack of hiring, though I have yet to hear a convincing argument that explains why this time we are that much more uncertain for that much longer than past recessions. And if the extension of unemployment benefits is the primary reason people remain unemployed, wouldn't you expect to see more people going out and getting jobs once those benefits expire? We don't, so that clearly can't be the main problem.

No mention of productivity advances in the past decade? Nothing about how globalization must, over time, lower U.S. wages? Nothing about debt to income ratios? Nothing about how "austerity" is forcing governments on all levels to shed workers? How about lack of labor mobility, either because health insurance is idiotically tied to employment, or because it's hard to move when you can't sell your house?

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Another force slowing down the recovery in employment was the result of more generous means-tested policies introduced
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[Karl]

I'm curious by what measure the jobs recovery from this recession is considered slower than the recovery from the recession of 2001. Since this recession was declared over in June of 2009, we have added 3,087,000 private sector jobs in 34 months. After the recession was declared over in November of 2001 we added 564,000 private sector jobs in the following 34 months.

One difference between the two recessions is government hiring. A decade ago we added 309,000 government jobs during the recovery. This time we have cut 601,000 government jobs. But even after adjusting for changes in government employment, we are still 1.6 million jobs ahead this time.

As for the reason for slow reemployment, Business Week surveys say it is uncertainty over demand that limits hiring. Uncertainty over regulations and tax policy may partially explain the shift to the use of temporary and contract workers. But these workers mitigate risks such as future health care costs under the Affordable Care Act.

On the other hand, over the last three years we have cut off extended unemployment benefits temporarily three times, creating uncertainty in the spending patterns of the recipients. We have also played chicken with the debt ceiling last summer, severely reducing hiring around that incident. We have also played chicken with the annual budget authorizations, creating uncertainty about the amount and timing of spending on government projects. All of these actions have probably done more to slow hiring than concerns about future health care costs under the Affordable Care Act.

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We should strengthen the manufacturing sector, create more jobs.

[Brad Edmondson]

Combining regulatory, policy, and demand uncertainty under the heading of "uncertainty" is much like combining MedicareAndSocialSecurity and finding that welfare spending is unsustainable. It's demand uncertainty that is preventing growth and hiring, and not policy uncertainty; similarly it is Medicare that is on a path to funding crisis, not and not at all Social Security, which has run surpluses for decades.

Please let's not pretend that your combination of a problem with a non-problem and your conclusion that both problem and non-problem must be fundamentally altered, is a serious policy analysis.

[Hillel Traub]

It would take a lot of effort for this administration to be recognized as a lot of mishap in the economy occurred during Obama's term. Sadly, people are too blinded by the fact that he was the first African American to be President and most let that pass by.

[Terry Bennett]

As I understand the prevailing wisdom, demand uncertainty is generally thought to be at least partly caused by policy uncertainty.

[Dave Thomas]

Why don't we reduce the cost of hiring an individual. I own a business and outsource every single thing I can to limit my exposure to liabilities that accompany hiring an employee. Making employers directly responsible for health care is just another tragic misplacement of social responsibility. Making employers responsible for more and more of workers lives that have nothing to do with work simply kills jobs as well.

[Thomas H]

Sir:

This is an important column today as it gives a commmentary on BLS numbers at the official start of the 2012 election campaign, and cites some economics experts who are household words. People like me were instructed in school some years ago about the dangers of uncertainty in things like the labour markets; and the capital markets, of course, and how dangerous it is to make attempts at manipulating these with executive policies and so forth. The paradox of the current administration's attempts to create jobs and its contribution to structural problems in view of long - term economic uncertainty now is palpable, and is probably in your colleagues literature as published some time ago (some of which is, again, cited here.) Would "wage and price controls" help at this point? When will the current policy makers be persuaded that monetary and fiscal influences do not really determine, nor do they assure success in the labour or capital markets (?), as in the beginning there are limits to growth and then there are other things that carry the day in commerce and economics than rules and regulations, social policy, etc. While it is not easy to mention the regulatory attitude has to be abolished first, and then people can return to work and their livelihoods; the simplest thing is to pass new rules and create policy while your column indicates the reason that might not be the best plan right now (all informally.) Good day.

[NEH]

As for "Policy Uncertainty" dare we call it an Obstrucionist Congress that would rather see the Nation collapse economically than to admit they're wrong. Unfortunately, it all reminds me of the following, "Don't bother me with the facts, my mind is made up"! And so things continue to decline. In a "Death Spiral" if you will, and so "Fear" raises it's ugly head once again and "Confidence" is the causalty. As well as a host of other things.

It's not about the Presidency, it's not about the Economy, it's all about the Congress...

[Raymond Bilodeau]

So a trillion dollar cash cushion is not enough to justify the risk of hiring a few people? The real problem is that the CEOs' obscene salaries/bonuses must increase every year. Selling things or making things to sell is just too risky to that mandate.

[MMc]

Even in the best of times, I have experienced little certainty in business. This discussion of uncertainty seems a bit academic. In my experience as a hiring manager, the only thing that ever made me hire is fear: the fear of being buried by my competitor. I hired people when the only way I'd be able to make enough stuff to keep my customers was to hire people.

Even if the future was far more uncertain, businesses would start hiring tomorrow if they believed demand could not be met with their current workforce.

I simply can't remember a time when I ever once evaluated future tax liabilities or regulations when deciding whether to hire someone. The equation was much simpler: "Will I lose business to my competition if I don't add workers? Do I have customers to buy what this new worker will make?"

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[NEH]

MMc, And so, there we have it. The Nation can't depend on the private Financial, Commercial, or Industrial Sectors to function as the actors to pull the Nation out of it's dire economic straits, but only as a reactor. The whole situation is much like a "Catch-22", "We're not about to begin hiring and bringing down the unemployment rate until the economy improves and the companies begin hiring again". Clearly, we can't depend on the Financial, Commercial, or Industrial Sectors to start the "Ball rolling". And for the individual Consumer, they are cash strapped and living in fear at the moment. So what's left? Only the Government, but we can't do that either because "priming the pump" is a Keynesian policy that's "evil". So we're stuck in the nightmare of a "Catch-22". Talk about irrationality and fear dominating the Economic landscape...

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[Jack]

Whew! Prof Becker really seems to have blown it on this one!

"Fear and uncertainty?" Wow! and is the fear irrational? or simply because consumers and business guys have a better sense about the utter LACK of demand than do macro economists?

Becker does not even mention the moribund housing industry that would be a huge driver in a normal or lesser recession. Why "housing?" Because young families with only a few bucks to spend, and older families can create a stream of economic activity as they buy their first home or later on spend on a move up home.

When the papers are signed and a few bucks changes hands each new home creates something like five full time jobs and more indirectly as new home buyers upgrade appliances, purchase new furniture and furnishings, along with decks fences and the occasional swimming pool. More than any other consumer purchase a LOT of activity now on the "pay for the rest of your life" plan.

Five or so primary jobs likely creates 15 more secondary "trickle around" jobs and don't forget "the financial sector".

Housing starts from peak to valley dropped by 2,000,000 starts so we might be talking 40 million working folk displaced by the housing crash.

Why are those jobs not rebounding? Obviously the overhang of having built far too many, often in the wrong price range or place, is a factor. Next is that of 700,000 being the number for replacement plus population growth. As the overhand is mopped up, over time, we'll gradually move from an "infill" market of building only that which is missing, toward the 700,000 figure and not above. Even that figure may be optimistic as housing loses the charm it had when money grew on them.

Will McCain and Cindy hang onto a dozen homes when they become more of a cost factor than "investment?" Same question for "Mom and Pop" who may sell either the town home or the lake home, or "downsize" from the family home.

Ha! early on in this mess --circa 2007 -- I cryptically remarked to a table full of folks in many aspects of the housing industry "that housing wouldn't recover until housing recovered". At the time none of us, including myself knew quite how deep the melt down would be, but my cryptic remark is just about the case.

Gspan put his views on "aged assets" in more academic terms as he reported on studying assets such as home, car, perhaps appliances that we buy rarely and when things are in the tank can hang onto for a long time. That new top of the line stainless refrig or gourmet cook stove comes when we've "had a good year" and we can make do with the old one or replace it with a cheap used one when things are as they are for so many.

Then this????

"Many others have also argued that the extension of unemployment compensation to 99 weeks clearly encouraged some of the unemployed to remain unemployed much longer than they would have if unemployment compensation ceased after a year."

........ Look we have at least the 9% unemployment they report and we all know that "underemployment" doubles that figure. So "some?" opt to ride out their unemployment rather than take a job paying so poorly that one's position is hardly improved? Great! doesn't that simply mean there MIGHT be a job for those in more dire straits? Say that of not being eligible for unemployment comp? or having exhausted their eligibility? Are there legions of desperate employers out there "wishing" unemployment benefits would go away so they'd not have to bid against even that pittance?

[Jack]

Some GOOD comments here!

I liked NEH..... "Keynesian war spending" Yep! if war no problem with huge deficits and D E B T topping GDP....... but! with $2 trillion of delayed infrastructure maintenance we don't "need" a war...... just similar courage to tackle what must eventually be done and put our guys to work H E R E. Not "over there".

And Tanstaaf? Can it be? Tans lamenting the downward domino effect of cutting government jobs at every level?

Social Security Lawyer?? Could it be that with the average SS recipient having only $22,000 average that adding $50 - $100/month to SS and fixing it by reaching up to claw back income that escapes SS contribution limits as virtually all of the productivity gains of the last 25 years went to the top few percent?

Terry: I'd suggest that in this mess "demand uncertainty" is econ jargon and crapola. Truth is with long stagnant wages, and the "2nd income" of stocks in the 90's and using the home as either an ATM or to bail out stock losses of the early 2000's there is certainty of demand being absent. Do these Chi guys understand that when folks don't have a buck to spend, there are only "wants and needs" rather than demand?

And Raymond. Ahh yes! We're both longing for the return of hands on company managers looking for efficiency (rather than wage cutting) and growing the company, rather than WS scammers buying up companies and parting them out for profit like a junked car.

NEH again: Certainly some of the 250 Repub House members know better, but all too many of them believe their "teabagger" litany. I doubt a mandatory Econ 101 for House freshmen would help as they'd thing it a lefty conspiracy or use the ideology override buttion.

NEH again! We really can not count on MFG for "jobs" as it is so efficient it could ramp up production with very little extra employment. Consider at the current high rate of unemployment there are no signs of shortages and with 11% mfg all that we count as mfg, a huge surge in demand for 20% more "stuff?" might mean a 2% increase in the mfg sector. That's not counting a 20% increase for Dell computers of Apple's I-stuff being lots of income for the company but jobs in Asia.

NEH again! Ha! all the slamming of the President who is at least polling 48% on job approval while the same figs for Congress are 9 - 13%

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Applications are falling again after rising for most of April, suggesting that hiring could pick up this month.

[jamesnt]

I do not think we are giving enough credit to how much businesses have automated in this recent downturn. As a software developer, I have over the past 3 years created many programs and processes that were for the sole purpose of allowing companies to NOT hire people. I have removed entired tasks from the hands of humans and turned them over to tireless 24-hour machines/computers. The technology we have today to totally automate tasks is unreal and companies are investing heavily in them.

At least 2000 people out there can blame me for why they don't have a job.

JamesNT