Monday, January 11, 2010

The Case For A Strong Employment Recovery

Barbera and Weise suggest the possibility that jobs could rebound quickly because firms cut too many jobs in the panic of the financial turmoil of late 2008 and will need to rehire as they increase inventory levels. However, Mark Thoma disagrees with their recommendation to provide minimal stimulus while waiting for the possibility of better than expected hiring. See the following post from Economist's View.

An argument that we don't need a "a major new stimulus program" devoted to job creation:

A job-rich US recovery is still plausible, by Robert Barbera and Charles Weise, Commentary, Financial Times: Only one short year ago, the world was staring depression in the face. Now the economy is recovering, but many commentators are warning of a “jobless recovery” of the kind that followed the last two recessions, in 1990-91 and 2001. ...

We believe that these meager expectations will turn out to be wrong, in large part because they mischaracterize how employment has swooned over the past two years. ... Our more optimistic outlook is based on a ... theory of why payrolls were cut so aggressively. Because of the turmoil in financial markets in autumn 2008, companies faced a severe cash crunch. As a result, they attempted to hoard cash in any way they could: they slashed order books, ran down inventories at an unprecedented pace and cut short-term borrowing. And they slashed payrolls. The drastic reduction in inventories and payrolls was not, in other words, a result of restructuring: it was symptomatic of panic, the same panic that caused the massive sell-off in equities, corporate bonds and mortgage-backed securities. ...

Nearly all projections for the US economy envision a sharp reversal for inventories in the coming quarters. We argue that the recovery in jobs should mirror the restocking of inventories because the collapse in employment and inventories during the recession had the same source in panic-driven cash hoarding. ...

The same logic can be applied to productivity. Using consensus expectations for current-quarter real GDP we estimate that the last three quarters of 2009 registered an average rate of advance in labor productivity of almost 7 per cent. We estimate that productivity is now above its normal level, so reversion to the mean over the next year implies a productivity growth rate substantially below trend.

The following scenario then appears quite plausible. Real GDP grows at a rate of 3.8 per cent in 2010, with productivity growth of 0.7 per cent and a modest increase in average weekly hours. In such a world, employment growth would average 2.2 per cent. This translates to an average of about 240,000 jobs per month.

This scenario, while wildly optimistic compared with current consensus forecasts, amounts to a weak recovery by historical standards. In the first full year of recovery after the 1981-82 recession, GDP growth was more than 7 per cent. Following the recession of 1974-75, growth was 6 per cent. It is not hard to imagine growth over the next year well in excess of our 3.8 per cent forecast, with jobs growth in the 300,000 per month range. We are not endorsing that as our forecast but we believe it is as likely as the jobless recovery predictions that define the conventional wisdom.

Barack Obama therefore needs to be patient. A modest fiscal stimulus focused on aid to the states would be a helpful insurance policy against a further weakening in the economy. But the trends are in the administration’s favour, and a major new stimulus program should be resisted. ...

They're not even willing to "endorse" their own forecast? They do implicitly define a forecast since they say the optimistic and pessimistic outcomes are equally likely. So why does a 50-50 chance that there will, in fact, be a intolerably slow recovery in the job market mean we should stand by and do nothing while we hope the coin comes up heads rather than tails? The average of the two forecasts - the most likely outcome by their reckoning - is not very rosy for labor and calls for something to be done.

There are lags between policy changes and changes in employment, and that means it's much easier to back off of action initiated now if things turn out to be better than expected than it is to do something later if the optimistic scenario fails to materialize. That is, the risks of failing to do anything and then realizing the pessimistic high unemployment outcome are much larger than doing something now and then having things turn out better than expected. Even on their own terms, I don't think their conclusion that we shouldn't devote any resources to job creation (other than protecting jobs through "modest" help for state and local governments) follows.

In any case, Dean Baker countered the part of the argument related to productivity before it was even made. Here's his response to similar claims about robust job growth:
Silliness on Productivity, by Dean Baker: In discussing the December jobs report the Post repeated some of the silliness about productivity that is currently circulating among people who imagine themselves to be knowledgeable about the economy. It told readers that:

Employers slashed positions more dramatically in the past two years, squeezing more productivity out of remaining workers. That has led many analysts to expect a substantial increase in the number of jobs in the early months of 2010, as companies must hire again just to keep up with demand for their products.

Actually, productivity growth averaged 2.6 percent annually over the last two years. This is somewhat more rapid than the growth rate over the prior two years but it is below the 2.9 percent average annual growth rate in the decade from 1995 to 2005. In other words, there is nothing extraordinary about the recent rates of productivity growth so there is no special reason for believing that a burst of hiring is imminent.
In case you somehow missed it, I'd be happy to be wrong, but I am not anticipating a sudden burst of job growth anytime soon, and this worry is not new by any means.

This post has been republished from Mark Thoma's blog, Economist's View.

No comments: