The Worst Recovery Since World War II-Becker

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.

 

 

Comments

[Mogden]

With the government doing absolutely everything possible to kick the can down the road, guaranteeing a detonation of amazing proportions at some point in the future, who can be confident in anything?

[Terry Bennett]

Uncertainty is a psychological state. As such, it can be real even if it is not objectively reasonable, although in this case it happens to be.

President Obama, the most visible member of the U.S. government, exhibits a uniformly negative attitude toward business, which is a world alien to him. I have never heard him say one nice thing about business. Every time he opens his mouth, he criticizes business. He similarly criticizes wealthy people at every turn, often inaccurately conflating the two.

Business people in this time thus do not know what to expect from government, but what we do know is that we cannot count on him to consider our interests. He is entirely capable, whether out of disdain or mere ignorance, of taking actions that will really hurt us. Obamacare is a prime example. I am amazed at the broad silence to date on the likely difficulties this new law is going to cause for businesses when it takes full effect.

Whatever the rest of the calculus, business people can properly have confidence that a President Romney, before taking any action, is at least going to stop and think how that action will affect business, because he has spent time making a living and he knows what it takes to do it successfully. We can have no such confidence under the current regime, and as much as the business community would like to return to a time of growth and profitability, I don't expect anything different economically before 2017 if the President is re-elected.

[Sanjeev Sabhlok]

Gary, your second point (policy uncertainty) is mystifying. I expect you to do better than this, not take someone's vague "calculation" on this issue.

The key problem is the rapid advance of Keynesian ideas, and the welfare state. That is necessarily bound to distort incentives. If you read Aurthur Brooks's The Road to Freedom you will recognise what is happening: Obama is destroying the MORAL FIBFRE of America. That's the policy problem in USA today.

Despite professional training as an economist (and I've followed in your footsteps in my analysis of populations), I've learnt to take 90 per cent of the mumbo jumbo created by economists with a great pinch of salt. Let's always ask fundamental and BASIC questions.

I'd appreciate if you can elaborate the philosophy and theory of "policy uncertainty". Let's call Keynesianism and social democracy just that: a destruction of freedom, which blocks entrepreneurship.

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[orv]

Business people in this time thus do not know what to expect from government, but what we do know is that we cannot count on him to consider our interests. He is entirely capable, whether out of disdain or mere ignorance, of taking actions that will really hurt us. Obamacare is a prime example. I am amazed at the broad silence to date on the likely difficulties this new law is going to cause for businesses when it takes full effect.

[B D Udoff]

Doesn't this "worst recovery since WW II" come of the heels of the worst financial crisis since WW II ?

[TANSTAAFL]

Becker correctly identifies policy uncertainty as a cause of our lingering economic downturn. Exhibit A: a Congress that in recent years lacks the will to produce an annual budget resolution. As others above note, another source of policy uncertainty is President Obama's unrelenting disdain for the private sector, manifested as arbitrary and capricious actions by the White House and executive agencies (Keystone pipeline blocked, slow walking of Gulf drilling permits, NLRB attempt to block Boeing plant in South Carolina, various anti-business EPA/SEC/FCC rules struck down by the courts, etc.).

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What the hell is this, i don't believe this.

[st]

both profs over estimated Gov and policy effect and totally ignore the culture change of 90 and 2000. A player hires A player; B player hires C player and things are going downwards from there. in order to secure his/her own position. With school put out many B players from MBAs, eventually, the landscape changed in US. Few A players on the top nowadays: just look at the financial, wall streets, corp, etc.

What you expect to fill a position with average university students pend 13 hour a week in class room? How do you answer a student walk into your office and ask: "tell me what I need to do to get my PhD? I'll do anything you say". The industry need someone can take an initial idea, run it, innovated, expended and move the field to next level, not a follower just repeat the steps of the manager/Sr. staff. When you get a university graduate with Mom and Dad step in to negotiate salary on interview (or willing sit outside your office to escort the kid), Houston, we got big trouble.

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Becker advocates sound policy. Calls by politicians for tax breaks and other public support for manufacturing appeal to sentiment (e.g., bring back the days of Rosie the Riveter), not logic.

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[pan]

Becker correctly identifies policy uncertainty as a cause of our lingering economic downturn. Exhibit A: a Congress that in recent years lacks the will to produce an annual budget resolution. As others above note, another source of policy uncertainty is President Obama's unrelenting disdain for the private sector, manifested as arbitrary and capricious actions by the White House and executive agencies (Keystone pipeline blocked, slow walking of Gulf drilling permits, NLRB attempt to block Boeing plant in South Carolina, various anti-business EPA/SEC/FCC rules struck down by the courts, etc.).www.diesel-generatorset.com

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[brad]

Rolling policy uncertainty and demand uncertainty into one category is a very disingenuous sop to Team Republican. The problem is demand uncertainty, not that Obama is insufficiently deferential to the Masters of the Universe.

I would really enjoy watching all of Freshwater Econ being exposed as partisan hacks and third-rate sophists, if you didn't have the ear of Team Republican, Ben Bernanke, and so many others in control of policy veto points. These policies are ruining lives by keeping unemployment up and aggregate demand down.

Goodness,we get it: you like laissez-faire policies independent of any evidence or logic. But do you have to be so obvious about it?

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It has been increadibly slow and I dont see much changing anytime soon.