We're in a Pattern of Increasingly Longer Employment Recoveries

An extremely useful chart was recently posted on the Calculated Risk site, showing recovery rates in US employment in all the previous recessions since WW-II. The author points to the fact that the recent revisions to employment figures have been worse than originally reported.

Given that the markets' focus is now back on employment, the trend is quite unsettling. However if you look closer at recent recessions, a frightening pattern emerges.

The last three recessions had consecutively longer periods of employment recoveries, increasingly lagging the GDP. This is probably worth further research, but one hypothesis is that credit driven employment growth takes longer to recover after a recession. In particular as the US shifted away from manufacturing, a great deal of job growth came from credit sensitive businesses such as construction. There is evidence that other than the Clunkers driven manufacturing blip, which has now stalled, a great deal of current employment activity changes is driven by construction spending.

If credit is indeed responsible for the consistently longer employment recoveries in previous recessions, we are in for some tough times even if GDP growth returns. The US is now into 21 months of employment contraction, reaching a post-WWII record, with no signs of unemployment peaking.

Comments

[Tack:]

The simple explanation for the longer recovery cycles is the constant extension of unemployment benefits. Altruistic as these may be, they still follow the immutable laws of economics.

As a dissenting senator from an agricultural state once said on the senate floor, many years ago, "where I come from, if you subsidize something, you get more of it." And, so it is with unemployment, too.

Oct 08 01:24 PM

[steve graves:]

Tack,

Subsidizing unemployment, right or wrong, is the only thing preventing outright revolution. Concluding that unemployment compensation is the cause of rising unemployment - i.e., ignoring all other factors that are obviously at work in this dynamic - is like proclaiming that law enforcement is what causes crime. Might sound witty booming off the floor of the senate but it's still bad logic.

Oct 08 02:45 PM

[Robespierre:]

Do you actually think that if there were no unemployment benefits all will be magically employed? Don't you think that perhaps there is no demand ($12B drop in credit) and therefore companies have NO incentive to increase production for products no one will buy?. BTW unemployment benefits are there to protect the politicians or do you think that a %10 unemployed and with no savings will not create the biggest social unrest this country has ever seen?


On Oct 08 01:24 PM Tack wrote:

> The simple explanation for the longer recovery cycles is the constant
> extension of unemployment benefits. Altruistic as these may be,
> they still follow the immutable laws of economics.
>
> As a dissenting senator from an agricultural state once said on the
> senate floor, many years ago, "where I come from, if you subsidize
> something, you get more of it." And, so it is with unemployment,
> too.

Oct 08 03:44 PM

[Pat C:]

Tack - Pretty soon someone will offer to take your job for 60% of what they pay you. Think about it.

Oct 08 05:07 PM

[Tack:]

If you provide a greater and longer incentive to a population of unemployed people, statistically, that will result in some of that population being less inclined to search for a job with urgency. I know everybody thinks that he/she would never bahave this way, but, nonethelss, that's how the laws of supply and demand work; if you provide an economic incentive not to work, some people will accept it.

That helps explain why recovery cycles trend longer and longer.

P.S. P.S. As I type this, the Senate is about to approve an extension of unemployment benefits for 99 weeks. But, of course, this has no effect on employment statistics.

Oct 08 05:49 PM

[Tom E.:]

Another explanation is that employers have used recessions as an excuse to terminate employees, then when things turn up they outsource or off shore the work instead of hiring in the US.

@ Tack: regarding the idea that extended unemployment benefits cause slower rehiring - if the amount of jobs posted were rising beyond normal ratios and the unemployment rate was staying the same, then you would have a point. But that has not been the case and so your argument is illogical.

Oct 08 06:13 PM

[steve graves:]

Tack,

You're basing your argument on what is probably no more than a few percent of the workforce - i.e., those who would rather continue to collect unemployment rather than accept a job that pays them considerably more (the degree of unemployment compensation is based upon a percentage of prior earnings...). You either need a new argument or perhaps simply a white flag; either way, aren't there better places to make a stand for the argument that the government is disrupting the natural "law" of supply and demand? What about bailouts?

Oct 08 06:56 PM

[sportsguy:]

The more capitalizm looks for cheaper sources of equivalent labor, and the US is one of the more expensive labor pools, the only change will be if the chinese unpegs their currency from the dollar, because then it will go higher, and then chinese labor + transportation will start to get a more equal playing field. . . ./

the issue is that the US employed doesn't want to take the equivalent hit to their incomes that are necessary to bring US jobs back from over seas, because then eveyone will default on their mortgages. . .

unemployment insurance is the ONLY recession spending that the US should undertake, and the US should tax the public company bonuses at much higher rates, as well as increase the FICA payment limit to unlimited, so that the unemployment and SS funds will be around when we HAVE to retire

Oct 08 08:15 PM

[Mill Rat:]

Without unemployment benefits, monetary velocity will plunge even faster and more deeply.

I suppose that the "Austrian School" economists would respond to that with: "Bring on the resulting deflation - the faster, the better."

Although I do find myself agreeing with some of the "Austrian School" economic theories, I also believe that society still needs to provide a modest safety net to those who have become unemployed through no fault of their own and are still willing to work.

Oct 08 08:22 PM

[Denis Gould:]

Maybe the pattern of slower employment recovery is because the jobs that have been created in recent years have been ever more contrived and parasitic ones compared to those that have been outsourced. So once you have got rid of the 10 man PR department or structured credit team you see little reason to hire them back until times are really easy again. Given that times are unlikely to get really easy within the next couple of decades it means structural unemployment at high levels. And social unrest.

Oct 08 09:17 PM