- The U.S. is in the midst of another “jobless recovery,” in the sense that employment gains have been meager relative to enormous job losses that occurred during 2008 and 2009.
- We anticipate that job gains will continue at a moderate rate, and that the pre-recession peak in private nonfarm payroll employment won’t be reached until 2013, nearly 4 years after the recession ended.
- This would be roughly comparable to the time it took to regain the pre-recession peak in employment following the 2001 recession, but approximately twice as long as the recovery in employment following the 1990–91 recession and approximately four times as long following recessions in 1970, 1973–75, and 1981–82.
- The overwhelming factor contributing to the much more sluggish pace of job creation in recent recoveries is much slower growth of output.
- In contrast, other factors — including productivity growth and changes in the workweek — have played only minor roles in accounting for slower growth of private nonfarm payrolls in recent recoveries.
- The severity of the decline in employment during 2008 and 2009 is largely accounted for by the weakness in output during the recession, and not by anomalous behavior of productivity.
Are we in a jobless recovery? Yes, if one doesn’t quibble too much with semantics. While it is not the case that there have been no jobs gained in the last few months, the pace of job creation has been frustratingly meager given the severity of the recession and the time that has elapsed since the formal end of the recession, in June 2009. Private nonfarm payrolls rose in each of the first nine months of the year, by a total of some 860 thousand, but this is only a small fraction of the 8½ million private jobs that were lost during 2008 and 2009.
We expect that the sluggish pace of recovery in employment will continue for some time. We anticipate that private payrolls will expand by just 90 thousand over the final three months of 2010, followed by an increase of about 2.7 million during 2011. In other words, according to the forecast, even 2½ years after the end of the recession, less than half of the jobs lost during the past two years will have been restored. Indeed, in our forecast, the previous peak in private employment, which occurred in December 2007, will not be reached until 2013, almost four years after the end of the recession.
The sluggish pace of recovery in employment that we anticipate is in some respects comparable to the experience following the recession that ended in 2001, but much different than in earlier recessions, especially following recessions in the 1970’s and early 1980’s. The previous peak in employment was not reached until 43 months after the end of the 2001 recession. The comparable figure following the 1990–91 recession was 24 months. During the three recessions that ended in 1970, 1975, and 1982, it took 13, 15, and 11 months, respectively, for the respective pre-recession peaks in employment to be reached.
It is beyond the scope of this brief Macro Musing to delve into a full analysis of why the last three recoveries (including the current one) are characterized by a much slower pace of job gains than the recoveries from the 1970, 1973–75, and 1981–82 recessions. However, we do offer a few observations to put the shift in context.
The most important reason for much slower job creation in recent recoveries is substantially slower growth of output. During the first two years following recessions in the 1970’s and 1980’s, output in the nonfarm business sector rose on average at a robust annual rate of 7.1%, but during the most recent three recoveries, output growth averaged a much more tepid 3.4% (nearby table). This is comparable to the differences in private payroll employment, which rose at an average annual rate of 3.5% during the earlier recoveries, but at only a 0.1% (!) average annual rate during the last three recoveries. The difference in these two growth rates — a reduction of 3.5 percentage points — is comparable to the reduction in the rate of output growth of 3.7 percentage points.
Conversely, other factors have been relatively unimportant in accounting for more sluggish job gains in the last three recoveries. In particular, it is not the case that faster productivity growth contributed on average to more sluggish job creation in the more recent recoveries. In fact, on average, productivity growth was 0.2 percentage point slower in the three most recent recoveries, relative to the earlier ones. Hence, the difference in the growth of hours worked (in the nonfarm business sector) between the two samples is actually slightly smaller — that is, about one-tenth of percentage point less negative — than the difference in average output growth. It is true that cyclical increases in the workweek contributed in small measure to hold down the pace of job creation in recoveries, but the average increase in the workweek is virtually identical across the two sets of recoveries highlighted in the table.
There are coverage differences between private nonfarm payrolls and employment in the nonfarm business sector; the latter includes a portion of self-employment for example, which is taken from the household employment survey, not the payroll survey. Nevertheless and not surprisingly, as the table indicates, private nonfarm payrolls and nonfarm business employment grew at nearly the same rates, so differences in the two measures are not significant in accounting for much slower pace of growth in private nonfarm payrolls during the most recent three recoveries.
Focus on the Current Recovery
The foregoing discussion grouped together the three most recent recoveries, because job gains are sluggish in all three. However, job losses during the last recession were considerably larger than during the two previous recessions, suggesting that job gains during this recovery might be more rapid than following the relatively “mild” recessions in 1990–91 and 2001. There is some evidence this is happening: the beginning of a sustained upturn in private employment began earlier following the last recession (after a delay of 7 months, in January 2010) than following the 2001 recession (after 21 months). Furthermore, we forecast that employment will grow more rapidly over the next couple of years (in percentage terms) than it did during the comparable stage of the recovery from the 2001 recession. Still, employment gains are expected to be much slower than following recessions in the 1970’s and early 1980’s.
Employers slashed payrolls rapidly and severely during 2008 and 2009, which raises the possibility of upside risk to our employment forecast during the recovery, if employers find that they trimmed their workforces too aggressively and need to rebuild them quickly to provide for increases in demand and output. We understand the argument, but we are not entirely persuaded by it because our model of productivity (and hence hours worked), which is an important driver of our employment forecast, has been broadly on track since before the recession began in 2008. Given the severity of the decline in output, the actual decline in hours worked during 2008 and 2009 was only slightly steeper than the model suggested, and the upturn in hours worked in the last few quarters has been broadly in line with the model as well. This suggests that the model provides a reasonable basis upon which to construct our forecasts for hours worked, and by extension employment, given our forecasts for output and the workweek.
We will soon publish a report on our modeling of productivity and hours worked that includes an analysis of the model’s predictions since 2008. In short, according to the model, most of the decline in hours worked during 2008 and 2009 (and by extension, employment) is accounted for by cyclical factors, especially, by the weakness in output.
This commentary was originally published on October 25, 2010.
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