I’ve been working on this post for some time, trying to identify a good way to introduce the subject. The graphic above, kindly furnished by The Big Picture, is as good a place to start as any. The unemployment situation is different in this recession than in other post-war economic downturns. Jobs are simply not returning at the rate that would have been expected. That unemployment remains a significant story is borne out by President Obama’s Thursday remarks on the subject:
President Obama today called the job numbers released this morning “positive news” but said there still is work to be done on the economy. The numbers showed a drop in the nation’s unemployment rate to 9.4 percent in December.
“Overall, the decline in the unemployment rate is positive news, but it only underscores the importance of us not letting up on our efforts,” President Obama said from the floor of Thompson Creek Manufacturing factory in Landover, Maryland.
“We know these numbers can bounce around from month to month, but the trend is clear,” Obama added, noting that this marks 12 straight months of private-sector job growth for the first time since 2006. “The economy added 1.3 million jobs last year, and each quarter was stronger than the previous quarter, which means that the pace of hiring is beginning to pick up.”
The year 2010 ended on a disappointing note, as the economy added just 103,000 jobs in December, suggesting that economic deliverance will not arrive with a great pop in employment.
Signs still point to a long slog of a recovery, with the unemployment rate likely to remain above 8 percent — it sits at 9.4 percent after Friday’s report — at least through the rest of the president’s four-year term.
That the president, Congressmen, newspaper editors, and bloggers like me pore over each of these reports like the entrails of an ox underscores the ongoing concern. President Obama’s re-election prospects are likely to rise and fall on the employment picture. As should be self-evident the economy as a whole and unemployment are in a deadly embrace. There’s no way we’ll see a robust recovery without a reduction in unemployment and there’s no way we’ll see a reduction in unemployment without a robust economic recovery.
In this post I’m going to reflect on a number of unemployment scenarios we might see.
There is little doubt that something is different. Over what is different and why it is different there is significant disagreement. The Keynesian or Neo-Keynesian view is that the present unemployment is cyclical in nature, there is presently inadequate aggregate demand, employment won’t grow to its former levels until aggregate demand returns to its former levels, and that the federal government as the consumer of last resort and unburdened (as state and local government in general are) by the constraints that balancing its budget might bring should be spending at a level high enough to boost aggregate demand to its former heights.
Paul Krugman is the dean of those who see the situation in this light. I won’t bother citing a specific column—that’s the message of practically every column he’s written over the period of the last eighteen months. It may even be a majority position among economists.
However, it is not the only view. It’s hard not to see the loss of jobs in the residential construction business including some of the associated jobs, e.g. realtors, plumbers, electricians, and so on, as not being structural in nature. With the enormous inventory of unsold new and existing houses (not to mention the significant number of foreclosures we should be expecting) is it likely that we will we see that many jobs in residential construction for the foreseeable future?
Additionally, propelled by the housing bubble and the attendant use of home equity for ordinary retail spending, the retail sector surely must have been larger as a consequence of that bubble than it otherwise would have been. Under the circumstances it seems to to me that the return of many of those retail sector jobs in the foreseeable future is pretty unlikely.
I think there’s another way we should be thinking about structural unemployment. More about that later.
The graphic above is from David Leonhardt’s year-end review for 2010 in the New York Times and it illustrates how long it would take to recover the jobs lost during the recession with three different rates of job increse: 300,000 additional jobs per month, 250,000 additional jobs per month (the pace during the mid-1990s, the period of the dot-com bubble), and 200,000 additional jobs per month.
Calculated Risk, among others, envisions job growth over the next several years at the rate of 250,000 additional jobs per month (the number of jobs added last month was about 100,000). That would appear to me to be the good, the optimistic scenario. If jobs grow at that pace and taking into account the roughly 125,000 new workers that come into the market each month, we would put those who are unemployed back to work some time in 2017, a period of about 72 months.
According to the NBER, the official scorekeeper for such things, the median post-war expansion was 45 months. Since the recession has been determined to have ended in June, 2009, the present expansion has been going on for 19 months. The last three expansions, the expansion of the 1980s, the expansion of the late 1990s, the the expansion of the Aughts, were 92 weeks, 120 weeks, and 73 weeks in length, respectively, and the last two of those at least were fueled by bubbles. During the last expansion we saw job growth at roughly 150,000 per month.
How long would it take to recover the jobs lost at that rate of increase? We’d never recover them. The next downturn would surely take place before the jobs had returned.
Let me repeat this: if you believe we are going to create 250,000 jobs per month for long enough to put those who are unemployed as of the start of the recession back to work you believe that we are going to experience the equivalent of another bubble economy and it will persist for at least five years. I don’t find that credible.
That brings us to the bad: the prospect that jobs are created at too low a rate to accomplish a return to full employment and we maintain chronically high unemployment. This is the situation that much of Europe has experienced for decades. The European solution to the problem has been to put much higher government support in place for those who are unemployed than has typically been the case in the U. S. This would certainly be bad, at least if you value the United States as it has been.
However, the alternative, chronically high unemployment without a system of government support for those who are unemployed because there are no jobs to be had, could be pretty ugly.