Monday, July 26, 2010

Labor Market Realignment and Jobless Recoveries

For the last week, I have been looking at the early 1990 and early 2000 recession. However, I have done this over a period of 5-6 articles that looked at smaller parts of the larger whole. Below is a complete picture of the underlying labor market picture for those two recessions that emerged over the smaller articles. For some readers, this may be redundant, but this article sums up the findings. I hope you find it insightful.

The US economy is currently experiencing its third "jobless recovery." However, this term is an incorrect description of the employment situation. Instead, the US labor force is going through a structural alignment where the amount of labor inputs necessary to produce durable goods is decreasing, despite an increase in overall output. This has important long-term ramifications for the labor market.

The Early 90s Recession

The NBER dates the early 90s recession as occurring between 7/90 and 3/91. Let's take a look at GDP growth before, during and after the recession:

Above is a chart of the percentage change in GDP from the previous quarter in real (inflation-adjusted) GDP. First, notice that in two of the four quarters preceding the recession the growth rate was below 2%. Also note that for the three quarters after the recession the growth rate was weak as well, with two of the three quarters printing growth rates below 3%. This graph illustrates that the quarters of the recession aren't the only quarters that experience slow growth. Instead, the official dates of the recession usually state when the growth was slowest with those dates surrounded by slow growth as well. Let's take a look at the post recession employment picture.

For nearly a year after the recession ended, initial unemployment claims remained between approximately 420,000 - 460,000, indicating that after the recession the employment market was still weak. In addition,

notice the unemployment rate rose after the recession ended.

Let's take a closer look at the establishment job data:

Above is a chart of the seasonally adjusted total establishment jobs in the economy. Notice that after the recession ended there was essentially no job growth; it wasn't until about a year after the recession ended that employers started to add jobs. Secondly, notice that it wasn't until about two years after the recession ended that the total number of establishment jobs reached their pre-recession peak. The total number of jobs lost from the peak to trough was approximately 1.6 million.

Above is a chart of total durable goods manufacturing jobs. Notice that like total establishment jobs, this chart dropped after the recession. However, while total establishment jobs started to increase in early/mid 2002, durable goods manufacturing jobs did not grow. From their peak in 1990 to their trough in 1993, this sector of the economy lost a little over 1 million jobs, meaning durable goods manufacturing jobs accounted for about 60% of jobs losses in the early 90s recession. Also note that while total establishment jobs began increasing in early/mid 1992, durable goods manufacturing employment stalled over the same time period.

The Early 2000s Recession

The NBER dates the early 2000s recession as 3/01-11/01.

Above is a graph of the percent change in real GDP from the previous quarter. This was a mild recession, as GDP during the recession turned positive for one quarter. However, like the early 1990s, this entire period -- roughly 3 years -- is characterized by weak growth before, during and after the recession.

Above is a chart of initial unemployment claims before and after the recession. Notice that initial claims remained elevated for over a year after the recession ended.

Above is a chart of the unemployment rate before and after the recession. While the unemployment rate was low -- peaking at just above 6% -- it remained elevated after the end of the recession.

Above is a chart of total establishment employment before and after the recession. Notice that total job losses were about 2.4 million (a drop from approximately 132.4 million to 130 million) from January 2000 to December 2003.

Above is a chart of total durable goods employment before and after the recession. Notice that total durable goods manufacturing employment dropped by about 2 million from January 2000 - December 2004. In other words -- like the early 1990s -- the "jobless" recovery was really caused by a structural realignment in the US economy as it slowly lowered the number of employees in the durable goods manufacturing section. Finally, consider these charts:

Above is a chart of total durable goods manufacturing employment in the US going back to 1939. I've circled the periods before the 1990s and placed rectangles around the 1990s and 2000s recessions. Notice that before the 1990s, durable goods manufacturing snapped back after a recession very quickly; the employment lines form a "v" shape. In contrast, durable goods manufacturing after the 1990s and 2000s recession comes back extremely late in the recovery (in the 1990s) or not at all (in the 2000s). The decrease in durable goods employment has led some commentators to argue the US manufacturing sector is deteriorating. This is not the case.

Above is a chart of industrial production for durable goods manufacturing. Notice that during the 1990s and 2000s expansion this number increased at strong rates, indicating US manufacturing was creating a large number of goods.

Above is a chart of output per hour of employee in the durable goods area. Notice that it has continually increased for nearly 30 years with a few dips. This chart indicates that US manufacturing employees have continually made more "stuff" per hour worked. This chart also partially explains the continued drop in US durable goods manufacturing employment: the US economy is making more with less.

Above is chart of manufacturing output, which confirms the output per hour of work chart above -- US manufacturing output is increasing. It is simply doing so with fewer labor inputs.


The "jobless recovery" is in fact a realignment of the US labor force. Fewer and fewer employees are needed to produce durable goods. As this situation has progressed, the durable goods workforce has decreased as well. This does not mean the US manufacturing base is in decline. If this were the case, we would see a drop in both manufacturing output and productivity. Instead both of those metrics have increased smartly over the last two decades, indicating that instead of being in decline, US manufacturing is simply doing more with less.