The Sluggish US Employment Picture-

The Sluggish US Employment Picture-

Garey Becker

Employment in the United States fell by a lot during the Great Recession from December 2007 to June 2009. The unemployment rate grew correspondingly from a low of 4.4% in May 2007 to a peak of 10.2% in 2009, and the underemployed grew even faster. That was bad enough, but the growth in employment and decline in unemployment since the trough of the recession has been quite slow. Forecasters got a shock on Friday with the release of preliminary data that indicated the unemployment rate rose a little from 9.6% to 9.8% in November rather than remaining stable or even falling a little. Although data for one month alone do not mean much because of large measurement errors, the average growth in employment over the past three months has been slow, and the unemployment rate has hardly budged. Even more disturbing is that the fraction of the unemployed who have been out of work for longer than six months has remained at a very high level of a little over 40%, up from the much lower level of about 15% prior to the recession.

The slow recovery is disturbing because speedy recoveries typically follow severe recessions. For example, the sharp contraction of the American economy between 1981-’82 produced an unemployment rate of 10.8% in December of ’82, but that was followed by a steady fall in unemployment to a rate of only 7.4 in November 1984. It has been one and one half years since the NBER determined that the Great Recession had ended, but unemployment has only fallen by about ½ of a percentage point, and the growth in employment has been well below the cumulative declines in employment during the recession.

Nor is the comparison between this recovery in employment and that of past recoveries the only cause for concern since some European countries have done much better. The Great Recession hit Great Britain hard since its banks were also in deep trouble, and Britain’s economy is in many ways similar to that of the US. Yet while Britain experienced larger declines in GDP during this recession than the United States did, its unemployment rate did not rise nearly as much, and is now under 8%, much below the American rate. Germany’s labor market is organized differently than the British labor market, its banks were in less trouble than were the Anglo-Saxon banks, and it subsidized employment during the recession. Nevertheless, it is noteworthy that while German exports, second largest in the world, had to sharply contract during the Great Recession, its unemployment rate is around 7%, and has fallen rather rapidly during the recovery.

One mechanical way to discuss what is happening to unemployment is to look at the growth in output, productivity, and capital. Given the growth in say GDP, the growth in employment and capital arithmetically must be smaller, the greater the improvement in productivity. American GDP has been growing at the unimpressive annual rate during the past two quarters of about 2%, while productivity has been improving at a quite good rate- it increased by 2.3% in the 3rd quarter of 2010. This leaves only limited, if any, room for growth in employment.

Some analysts have seized on this purely arithmetical relation between output, inputs, and productivity to argue that the continuing improvements in productivity explains why employment has been increasing so slowly since the end of the Great Recession. However, the attempt to impute causation from productivity growth is a mistake since employment can grow rapidly even when productivity is growing rapidly if the growth in output is sufficiently rapid. The history of the United States and all other countries that experienced good to rapid economic growth since the end of World War II is one of quite rapid growth in both productivity and in employment.

If an economy had a fixed number of jobs, then advances in productivity might well eliminate some jobs-the way computers eliminated many clerical jobs- and fewer jobs would remain. Advances in particular technologies have sometimes eliminated certain jobs, but they have often created an even larger number of new jobs, the way many jobs now depend on the computer and Internet.

The main reason why employment has been growing slowly in the United States is not the advance in productivity, but rather it is that many companies do not want to add many employees because they feel very uncertain about what will happen to demand, profits, and costs during the next year or two. Although banks are flush with over a trillion dollars of excess reserves, they have been reluctant to lend to new and other small firms that want to borrow, or to consumers, because banks are uncertain about whether they will be paid back on time by the borrowers.

Some uncertainty by borrowers and lenders is inevitable coming out of a severe recession. However, that normal uncertainty has been magnified by fears about the government sector. Many businesses have been afraid that the new healthcare law will raise their employment costs, that taxes and regulations on business, high incomes, and investments will go up, that the financial reform act will excessively increase the costs of banking and of other business activities, that the growth in government and the large deficits of the past several years will force increases in future taxes, a smaller private sector, and a less efficient economy.

I have been arguing on this blog and elsewhere that the best approach now is for Congress and the president to concentrate on increasing long-term economic growth (see my post on 11/07 for an agenda for growth). This would require low taxes on investments, encouragement to basic R&D, and sharp reductions in expected government spending, especially on social security retirement income and Medicare and Medicaid. Tax revenue would also have to increase, and this could be accomplished through widening the tax base, such as by eliminating the tax exemption on mortgages, by flattening out income tax rates, and perhaps also by adding a value added tax.

Many in China and elsewhere believe the US economy is too sick to be cured. I do not agree, but recovery would require some unpalatable medicine with regard to spending and taxes, somewhat along the suggested by the recent majority-backed Report of the National Commission on Fiscal Responsibility and Reform. Unless the US takes serious actions to promote its long-term growth, the next decade may be a very difficult one.