Job Losses Are Not the Problem

It is sometimes argued that recessions benefit the economy by allowing the destruction of old, inefficient economic structures so that newer, better ones can be created to replace them. On the surface, this story might seem to apply to the recent recession: ostensibly, a lot of useless jobs in finance, real estate, and construction were destroyed, as well as perhaps old manufacturing jobs that hadn’t caught up with the latest technology, and jobs in retail trade that needed to be replaced by the Internet, and so on. But there’s one problem with that point of view: overall (at least during the first four quarters of the recession, up through the end of 2008, for which we have the relevant data), there weren’t an unusually large number of total jobs being destroyed.

But...but...but...haven’t we been hearing about large numbers of job losses month after month since the recession began? Sort of. We’ve been hearing about large numbers of net job losses. That is, the number of jobs that have been lost has been a lot more than the number that have been created. And a lot of job losers have ended up collecting unemployment insurance for a long time, sending the figures for continuing claims up to records, instead of getting new jobs. But the gross number of jobs being destroyed has not been unusually large. In fact, relative to the overall level of employment, job destruction was happening at a faster rate during the boom of the late 1990s than it was during the last quarter of 2008.

How can that be? For one thing, when you take out the business cycle, there seems to have been a general downward trend in the rate of job destruction over the past 10 years. More important, the rate of job creation also had a downward trend, and it dropped to new lows during the recession of 2008. If you lost a job in 1999, you weren’t actually all that atypical, but it wasn’t a big problem, because typically, you could find a new job fairly easily. If you lost a job in 2008, you were (typically) out of luck.

click to enlarge


Source: Business Employment Dynamics data from the Bureau of Labor Statistics

The fact is, job creation and job destruction take place during booms at rates that are not dramatically different from the rates during recessions. It’s just the difference between the two that changes. In a typical boom quarter, about 7 million jobs are destroyed, and about 8 million are created. In a typical recession quarter, about 8 million are destroyed and about 7 million are created. There just isn’t much support for the idea that recessions give us a special ability to reallocate resources more intensely than we do during a boom or a period of normal growth. “Creative destruction” is a dynamic process that continues all the time, not one that occurs in separate phases of creation and destruction.

And the most salient feature of the current episode is that there has been unusually little creation. From the 1990s to the 2000s, the quarterly job creation rate fell from about 8% to about 7%. Since 2006, it has fallen to about 6%.

Some might argue that this type of slowdown in job creation is inevitable during times of structural change and that it is useless to try to oppose it with monetary and fiscal policy. It takes a long time (Arnold Kling, for example, would argue) for the economy to come up with ideas for new, productive uses of resources when the old uses are no longer productive. Monetary and fiscal policies can’t do much to speed up this process. They can’t make entrepreneurs more creative.

I’m skeptical of that view: entrepreneurs were plenty creative during the 90s, once the booming stock market gave them a reason to apply their creativity. Monetary policy really did help speed up the process of finding new uses for resources: low interest rates led to high equity prices, which made it easy to raise capital and thereby made it advantageous to find new ways of using capital. Some would say the process went too fast in the end, with a large fraction of the uses proving ultimately unproductive, but statistics show aggregate productivity rising rapidly and continuing to rise during the subsequent years, even (atypically) during the recession that immediately followed the boom. There may have been a lot of froth, but there was plenty of good beer underneath, and monetary policy is what opened the tap.

In any case, even if I were to concede that monetary and fiscal policies don’t help speed up the adjustment process, they do help us get the most out of the economy in the mean time. With nearly 10 percent of the labor force unemployed, there are a lot of resources being wasted – people spending their time looking for jobs that many of them just aren’t going to find until we get a lot more economic activity. There are plenty of useful things that those people could be doing in the mean time.

Perhaps more important, monetary and fiscal policies help us reduce the risk that a weak economy – too weak for too long – will fall into a deflationary spiral. As long as job creation remains weak, employers have little incentive to raise wages, and competition will tend to push down prices. Even an “artificial” stimulus, one that doesn’t accelerate the structural adjustment process, will create a demand for labor and force employers to compete somewhat for workers. That competition, in turn, will prevent them from competing too aggressively in product markets and keep prices reasonably stable.

There is, of course (in theory, at least), the risk that policies will go too far and not just prevent deflation but produce excessive inflation. As I have argued before, we are nowhere near that point right now. I made the case against inflation using mostly the unemployment rate, but the case becomes even stronger when you consider the job creation statistics. This unemployment is specifically being induced by a slowdown in job creation. Job creation is specifically what leads to inflation: it’s when companies want to hire aggressively that they start raising wages excessively and competition becomes unable to keep prices in check. If unemployment – which arguably has a more tenuous relationship to inflation – is far, far away from the danger point, job creation – which has a direct relationship to inflation – is even further away.

Disclosure: Through my investment and management role in a Treasury directional pooled investment vehicle and through my role as Chief Economist at Atlantic Asset Management, which generally manages fixed income portfolios for its clients, I have direct or indirect interests in various fixed income instruments, which may be impacted by the issues discussed herein. The views expressed herein are entirely my own opinions and may not represent the views of Atlantic Asset Management.

Comments

[437339:]

Marketman54 + untrusting ,

You are correct !

Aug 30 10:58 PM

[kcr357:]

Read "who moved my cheese". I got tired of the low paying bs jobs, and went a different route. I analyzed my strengths, and found a few ways to make good income while in school. I now am able to make 50+ an hour doing upholstery in a niche market(I net about 400 in a so so week, when I dont have work in that area, I fix and resell jet skis, making 300-1000 for less than 10 hours of my time, and usually a negligible amount in parts if I get a good ski) 6 months ago I had 30 bucks in my checking account, and was desperately looking for a 10 dollar an hour labor job. Got tired of it and said enough is enough. If you put the persistance you're exerting into finding a bs 12/hr job into finding another route to make money, I am sure you will find it. Seeking money and seeking a job will usually end in two different outcomes.


On Aug 30 01:35 PM Karen Consumer wrote:

> My current job is looking for a job. Today I start week 10, and
> I'm looking for a job that will pay $12 an hour, because no one is
> going to pay me $20.27 (which is what I was making), nor will they
> pay me $18, $16, or $14. $12 is what they are offering, and damn
> few of them are offering it.
>
> So far 98 applications/resumes, 1 (one) interview, and NO job offers.
> So inflation (job creators going nuts trying to hire me) is the least
> of my worries.
>
> And what other worthwhile things do you think I should be doing?
>
>
> Volunteering is out of the question, as that takes me away from my
> full time job hunt, and most of those positions have either been
> taken by people unemployed longer than me, or have gone away because
> donations are down and places have had to close their doors (Brighter
> Tomorrows, a women's abuse victim shelter is a specific example here
> in Texas, had 3 buildings, are now down to 2, even though help requests
> have doubled).
>
> Going to school is also limited. All I can afford is community college,
> which is already over capacity from all the unemployed who have been
> on the rolls longer than me, it counts against me if I do it during
> 8-5 business hours (because then I'm not able to look for work according
> to workforce rules), and books aren't covered by any loan program.
> So while I could afford $90 for a 3 credit hour, normally books run
> $200-$500 per that same credit hour (and those are the used prices,
> which there are very few used books out there). And getting the
> state to pay for training is a no go, my friend E has been trying
> to get state paid training (she's having to leave computers all together
> and is going for nursing) but the state and the feds are still working
> on the release of funds (4 months and counting).
>
> So I pray and hit the job boards. And hope that the government slows
> down the 'screw the american people, save the too-big-to-fail banks/financial
> institutions and make a legacy Obama can be proud to have changed'
> mentality.

Aug 30 11:27 PM

[ebworthen:]

You sound like you are trying to convince yourself that what you say is true.

If we concede your point that creation and destruction occur at the same time, a glance at your chart reveals that creation has dropped with the same rate as destruction, and that job destruction has spiked since 2008, while creation has dropped dramatically in the same time period.

In a deleveraging debt crisis bubble where prime loans are starting to fail, this spil is much worse than it appears. In a 70% consumer spending economy the trend is even more serious.

Honestly, your tone is one of convincing yourself, which tells me that you have a real fear (and knowledge) that things are a lot worse than you are willing to admit.

Aug 30 11:40 PM

[ebworthen:]

Oh yeah, I forgot to say, your charts are of "jobs" not "careers".

There are lots of jobs, but you can't pay health insurance premiums and mortgage payments and obsence taxes making $25K a year, much less median wage.

Just because someone isn't drawing unemployment doesn't mean they have a career that pays a livable wage that allows them to buy a GM or invest in GS stock or pay the 15% increase in HMO premiums every year.

Ooooopppssss....

Aug 30 11:46 PM

[Dialectical...:]

So just to be clear... the patient is bleeding to death, but it's not the blood loss that's problem, it's that he's not making red blood cells quickly enough. Interesting theory.

Aug 31 12:11 AM

[Boxed Merlot:]

Boom quarter = 7M destroyed / 8M created. Recession quarter = 8M destroyed, 7M created. Sounds like a simple enough explanation. However, linking several recession quarters together as a result of the destruction of consumer credit is evidently a new scenario that escapes the Keynesian play book of creative destruction. Perhaps an end-around “debt” funding, a sort of “Hail Mary” throwing to the end zone of +$2T of Fed “reserves” at the unruly money market masses will do more than their paltry $.8T did last year. The text book says it should. Mene Mene Tekel Parsin

Aug 31 12:22 AM

[Joe Shareho...:]

The case you made for this being a job creation problem was weak. There has been definite job destruction, and if you don't see it, you're not talking to your neighbors, nor are you reading the newspapers. Just last week Whirlpool and Toyota announced plant closings. Your thoughts on that?

Aug 31 01:03 AM

[Anthony B:]

Thanks for taking the time to analyze the two components of the net job stats. Agree with your conclusion about inflation.

I think an asset price floor has been reached though, that the gov will not allow to be broken. Could be a scary year when job creation returns and all the tax credits don't sunset soon enough.

Aug 31 01:12 AM

[Mr. Ed, Jr.:]

The unemployment rate is not "nearly 10 %". It is more like 16 %. It doesn't matter that politicians don't want to count everybody that is unemployed so that they can keep their own cushy jobs-- we must stop "enabling" them. How absurd is it that when hundreds of thousands more people lose their jobs in one month, the government's unemployment % DECREASES ? A fifth grader would know that can't happen. We are actually smarter than a fifth-grader, aren't we ?

We are in a credit/debt recession, not the usual "business cycle" of expansion and contraction of the economy. So, let's also stop pretending that this is an ordinary recession. Now, that's not to say "It's different this time" , because it probably isn't, when you compare debt recessions to other debt recessions. The last debt recession, (about 80 years ago) was given a name, as you may recall.

More shoes dropping.....commercial real estate, record numbers of NOD's , pension funds going bust, increasing numbers of cities, counties and states going broke. Economic stimulus is going to have an almost impossible task of permanently overtaking the massive deleveraging that is occurring. For a time, stimulus may perk things up a bit, but the deleveraging process is going to happen, regardless. Top that off with the certainty that taxes will be raised, thus creating an additional counterweight to stimulus efforts.

By the end of September, it is estimated that a half million unemployed will run out of benefits...another million fall off the rolls by the end of the year.

Job creation is extremely difficult during deleveraging, and this unwinding is the biggest the world has ever seen. It will be government doing a lot of the hiring for the next several years, as the unemployment % will force politicians to allocate more funds for what are really "makework" jobs. Broke, unemployed voters are bad news for any political incumbent.

Aug 31 02:11 AM

[Gary A:]

Yes Karen, the problem with economists is that they don't have a clue. For them you can just volunteer and eat cake, I suppose. If economists would get out of their glass houses or even look through the window they could learn something. With regard to volunteering Andy obviously is just not real.


On Aug 30 01:35 PM Karen Consumer wrote:

> My current job is looking for a job. Today I start week 10, and I'm
> looking for a job that will pay $12 an hour, because no one is going
> to pay me $20.27 (which is what I was making), nor will they pay
> me $18, $16, or $14. $12 is what they are offering, and damn few
> of them are offering it.
>
> So far 98 applications/resumes, 1 (one) interview, and NO job offers.
> So inflation (job creators going nuts trying to hire me) is the least
> of my worries.
>
> And what other worthwhile things do you think I should be doing?
>
>
> Volunteering is out of the question, as that takes me away from my
> full time job hunt, and most of those positions have either been
> taken by people unemployed longer than me, or have gone away because
> donations are down and places have had to close their doors (Brighter
> Tomorrows, a women's abuse victim shelter is a specific example here
> in Texas, had 3 buildings, are now down to 2, even though help requests
> have doubled).
>
> Going to school is also limited. All I can afford is community college,
> which is already over capacity from all the unemployed who have been
> on the rolls longer than me, it counts against me if I do it during
> 8-5 business hours (because then I'm not able to look for work according
> to workforce rules), and books aren't covered by any loan program.
> So while I could afford $90 for a 3 credit hour, normally books run
> $200-$500 per that same credit hour (and those are the used prices,
> which there are very few used books out there). And getting the state
> to pay for training is a no go, my friend E has been trying to get
> state paid training (she's having to leave computers all together
> and is going for nursing) but the state and the feds are still working
> on the release of funds (4 months and counting).
>
> So I pray and hit the job boards. And hope that the government slows
> down the 'screw the american people, save the too-big-to-fail banks/financial
> institutions and make a legacy Obama can be proud to have changed'
> mentality.

Aug 31 03:24 AM

[Michael Clark:]

Interesting article.

I hope you will revisit this issue in 2019 as we approach the bottom of this depression. See if the numbers look the same at that time.

Aug 31 07:04 AM

[Michael Clark:]

They call economics the 'dismal science'. The problem with that description is not the 'dismal' tag, since many sciences are rather dismal, at least to the outsider. The real problem with that moniker is the 'science' part of it. Science puts a man on the moon -- it can be that exact. Economics, at best, is an art. At worst it is the equivalent of a weather report. I used this line on many occasions: "What are the only two jobs where you can be wrong 100% of the time and not be fired?" The answer, of course, is weatherman; and economist. Alan Sinai, for instance, was a regular visitor on finance television through the 1980's and 90's and less so now. I've developed my Alan Sinai Indicator, which is sort of like George Costanza's anti-George Costanza's behavior modification: if every instinct I've ever had in my life has been wrong, then what I need to do to change my life is to do the opposite of everything my instinct tells me to do. Well, I've come to believe the opposite of everything Alan Sinai says.

(I'm not trying to be mean to Alan. I actually like Alan Sinai much more than Ben Bernanke.)


On Aug 31 03:24 AM Gary A wrote:

> Yes Karen, the problem with economists is that they don't have a
> clue. For them you can just volunteer and eat cake, I suppose. If
> economists would get out of their glass houses or even look through
> the window they could learn something. With regard to volunteering
> Andy obviously is just not real.

Aug 31 07:12 AM

[Michael Clark:]

I believe that much of what you say is true. But I also believe that, without the federal government, and with only the supremacy of private enterprise, workers in America would still be working for $1 a day 7 days a week. I don't have your faith in the private sector. The private sector has been busy sending all our jobs to Asia, Mexico and India. Don't put too much trust in the private sector. The private sector wants American workers to 'compete' with Asians making $200 a month. What's good for GM or Caterpiller or IBM or Bank of America is no longer necessarily what is good for Americans.

We dissolved all the rules and turned the world over to self-regulating private enterprise in the last two decades and private enterprise showed it was NOT ABLE to police itself. It stole, lied, cheated and crashed.

We are now at that very tenuous position in the recreation of a new system wherein faith in either side is no longer possible. The government is corrupt and self-serving; corporations are corrupt and self-serving. We need a new model, one that recognizes the limitations fo both poles which have been fighting to control our world. The complete dominance of either side does not work.

I don't want to be governed by Goldman Sachs. I'm sure of that. Perhaps the government and Big Business must have an adversarial relationship, as a way of making sure that corporations do NOT become big enough to take over control of our government. It seems that is the first issue we need to address, before moving to the other issues.


On Aug 30 08:07 PM [e-mail] wrote:

> Jobs come and go. Sometimes there are more job losses than gains
> and vice versa. Under normal economic circumstances. Today is not
> normal. The government is doing all in its power to destroy America.
> Rules, laws, regulations, executive orders and on and on to frustrate
> and prevent the private sector from doing its job creating activity.
> Higher taxes, larger government, greedy government, power and control
> hungry government. Restrictions on drilling, coal, nuclear. Wasted
> money on 'green project boondoggles'. Huge national debt, Cap &
> Trade, national health care, refusing to face the additional financial
> problems associated with Social Security, medicare and prescription
> drugs. Politicians who care only about re-election and the health
> of the Nation a distant second. Federal employees who receive twice
> the pay as those in the private domain. A government trying to nationalize
> industry. A government that is a parasite, a leech, and a blood sucker
> that saps the health of private businesses and individuals. Folks,
> time to wake-up and elect love America, decent and honest individuals
> to return us to a path leading to that America which is a light to
> the world and truly, 'The Home of the Brave and The Land of the Free'.
> If this does not happen, job creation will not happen.

Aug 31 07:23 AM

[markfl:]

Mr. Harless,

There have been a number of references in the comment stream regarding the gains/losses in private vs. government employment. It was my understanding that data series such as BDS0000000000000000110... include only total private employment (seasonally adjusted), not government. I wished you'd have replied to some of the comments and/or included the specific data series used in constructing the charts.

Aug 31 07:47 AM

[Michael Clark:]

GOOD LUCK WITH YOUR SEARCH, KAREN.

We cannot have salaries going down and prices going up. Deflation requires that salaries and prices go down TOGETHER. Our leaders are terrified of deflation -- because they own many assets --houses, property, stocks and bonds -- assets that will lose value in a deflationary cycle...and our leaders will do whatever they must do in order to make sure they don't lose everything they've worked for. They will sell out the elderly and the poor of their own nation, in order to keep their own riches.

But deflation is God's anger (that is a metaphor of course -- deflation is the 'emptying out' half of the process, as inflation is the 'filling up' half of the process) directed at a nation that has forgotten or foresaken its roots -- and leaders turning their back on the poor is also a part of this foresaking of roots -- which happens to every nation during the Great Inflation of the Economic Bubble and the arrogance and pride that comes with that. Deflation will not be denied however.


On Aug 30 01:35 PM Karen Consumer wrote:

> My current job is looking for a job. Today I start week 10, and
> I'm looking for a job that will pay $12 an hour, because no one is
> going to pay me $20.27 (which is what I was making), nor will they
> pay me $18, $16, or $14. $12 is what they are offering, and damn
> few of them are offering it.
>
> So far 98 applications/resumes, 1 (one) interview, and NO job offers.
> So inflation (job creators going nuts trying to hire me) is the least
> of my worries.
>
> And what other worthwhile things do you think I should be doing?
>
>
> Volunteering is out of the question, as that takes me away from my
> full time job hunt, and most of those positions have either been
> taken by people unemployed longer than me, or have gone away because
> donations are down and places have had to close their doors (Brighter
> Tomorrows, a women's abuse victim shelter is a specific example here
> in Texas, had 3 buildings, are now down to 2, even though help requests
> have doubled).
>
> Going to school is also limited. All I can afford is community college,
> which is already over capacity from all the unemployed who have been
> on the rolls longer than me, it counts against me if I do it during
> 8-5 business hours (because then I'm not able to look for work according
> to workforce rules), and books aren't covered by any loan program.
> So while I could afford $90 for a 3 credit hour, normally books run
> $200-$500 per that same credit hour (and those are the used prices,
> which there are very few used books out there). And getting the
> state to pay for training is a no go, my friend E has been trying
> to get state paid training (she's having to leave computers all together
> and is going for nursing) but the state and the feds are still working
> on the release of funds (4 months and counting).
>
> So I pray and hit the job boards. And hope that the government slows
> down the 'screw the american people, save the too-big-to-fail banks/financial
> institutions and make a legacy Obama can be proud to have changed'
> mentality.

Aug 31 07:52 AM

[Michael Clark:]

Maybe job destruction was occurring during this expansion because all the job-creation was for new branches being set up in Mexico, China, Vietnam, the Philippines....

Aug 31 08:59 AM

[Sailorman:]

What passions and talents do you have that you can be self employed? We need to learn to make it on our own and not blame or relly on some one else to solve our problems.


On Aug 30 01:35 PM Karen Consumer wrote:

> My current job is looking for a job. Today I start week 10, and
> I'm looking for a job that will pay $12 an hour, because no one is
> going to pay me $20.27 (which is what I was making), nor will they
> pay me $18, $16, or $14. $12 is what they are offering, and damn
> few of them are offering it.
>
> So far 98 applications/resumes, 1 (one) interview, and NO job offers.
> So inflation (job creators going nuts trying to hire me) is the least
> of my worries.
>
> And what other worthwhile things do you think I should be doing?
>
>
> Volunteering is out of the question, as that takes me away from my
> full time job hunt, and most of those positions have either been
> taken by people unemployed longer than me, or have gone away because
> donations are down and places have had to close their doors (Brighter
> Tomorrows, a women's abuse victim shelter is a specific example here
> in Texas, had 3 buildings, are now down to 2, even though help requests
> have doubled).
>
> Going to school is also limited. All I can afford is community college,
> which is already over capacity from all the unemployed who have been
> on the rolls longer than me, it counts against me if I do it during
> 8-5 business hours (because then I'm not able to look for work according
> to workforce rules), and books aren't covered by any loan program.
> So while I could afford $90 for a 3 credit hour, normally books run
> $200-$500 per that same credit hour (and those are the used prices,
> which there are very few used books out there). And getting the
> state to pay for training is a no go, my friend E has been trying
> to get state paid training (she's having to leave computers all together
> and is going for nursing) but the state and the feds are still working
> on the release of funds (4 months and counting).
>
> So I pray and hit the job boards. And hope that the government slows
> down the 'screw the american people, save the too-big-to-fail banks/financial
> institutions and make a legacy Obama can be proud to have changed'
> mentality.

Aug 31 11:19 AM

[Dialectical...:]

I have read several comments by Karen and never has it sounded to me like she was relying on someone else or blaming anyone else. To the contrary she has always sounded like someone who will do whatever it takes to find a job. And in case you didn't know there are six people out of work for every job opening right now, so even if two of them are unemployable that leaves you with a 25% chance of finding a job in this economy. You mention the self employment option.... As a small business owner I can say this doesn't mean you're not working for someone else (the clients or customers) and it certainly doesn't mean you can ignore the economy. Web site design? Affected by downturn in economy. Selling Avon? Affected by downturn in the economy. Mowing lawns? Affected by downturn in the economy. You get the point. Wokring for oneself is not a guarantee that you can make money. In this economy it simply means when you lose your job you can't collect unemployment (since self employed do not pay unemployment tax they can't collect if they go under). I wish Karen luck in her job search.

On Aug 31 11:19 AM Sailorman wrote:

> What passions and talents do you have that you can be self employed?
> We need to learn to make it on our own and not blame or relly on
> some one else to solve our problems.

Aug 31 11:36 AM

[Andy Harless:]

What is the “true” unemployment rate? (It’s a bit of a tangent, but since a few people have mentioned it, I thought I would address this.) I don’t think there is any “true” unemployment rate. There are a number of different possible ways of defining “unemployment.” One is not more “true” than another. Having an argument about what is the “true” unemployment rate is like having an argument about whether soccer or American football is the “true” football. You could have a reasonable argument about which is a better game, and similarly, you could have a reasonable argument about which is a more useful definition for unemployment, but it doesn’t mean that people who define it differently are lying.

Unemployment by the broadest definition has always been higher than the unemployment by the “official” definition. The difference is larger now than in the past, mainly because an unusually large number of people are working part-time that would prefer to be working full-time. These people don’t count as unemployed under the official definition, because they actually are employed, just not as employed as they want to be. So it is probably true that the official unemployment rate is giving an overly optimistic reading, compared to what a similar reading would have meant 25 years ago. This is not the result of some kind of conspiracy; it’s just that times change, and some measures don’t have quite the same implications as they did in the past.

I use the official definition for convenience, so that I won’t have to explain why I’m using a different definition. I don’t think it would affect my argument much overall if I took into account the “underemployed.” On the one hand, there are jobs that switched from full-time to part-time, and these might be considered “shadow job losses” that I’m ignoring, so maybe job losses are more of a problem than I’ve said. On the other hand, a significant fraction of the new jobs being created are probably part-time jobs, so arguably they shouldn’t be included in job creation: in that respect I’m understating my case that lack of job creation is the main problem.

Aug 31 05:34 PM

[Suncatcher:]

It is very simplistic but worth mentioning anyway. If we want to diminish the power of the large= don't reward them with your business whenever possible. The closer you get to individual - individual the stronger our roots get. For instance don't do your banking with the big guys go to a small local bank even though it may cost a bit more. I won't belabor the point but you can "buy small" and do a bit to change things. It's more rewarding than feeling powerless.

Aug 31 09:03 PM