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This Week Has Bad News on the Unemployment Front

The End of Procyclical Labor Productivity?

Nick Rowe:

Worthwhile Canadian Initiative: US Productivity Exceptionalism: I could understand if the US had the worst output and employment during the recession. I could fake up some explanation. "The US, with the bursting of its house price bubble, was the epicentre of the financial crisis, blah, blah...". I could understand if the US had the best output and employment during the recession. I could fake up some other explanation. "The US, with its free market economy and labour mobility, is remarkably resilient to shocks, blah, blah...". What I can't understand is why the US had the second best output, and yet by far the worst employment. That would require two fake explanations, and it would be hard to make those two explanations consistent.

Each of us thinks our own country is normal. We try to explain why other countries are different. That's especially true if our own country is a large country, like the US. But when you compare the US to all the other G7 countries, you see that it's the US that is abnormal, and in need of explanation.

Ignore the US in Stephen's graphs, and everything looks normal. Some countries did worse than others, and the countries that did worse on GDP tended to do worse on employment. You get roughly the same ranking on either measure. Moreover, the decline in GDP was about two or three times as big as the decline in employment. That's what we would expect, from Okun's Law. It's the US that doesn't fit the pattern. The US is abnormal, and in need of explanation.... [I]n the US [labor productivity] didn't fall at all. Labour productivity actually increased. GDP fell a little over 4%, peak to trough, and employment fell nearly 6%, so the GDP/employment ratio increased by over 1%.... Why did US productivity increase during the recession? Why doesn't your explanation also apply to the other 6 countries?

Why is the US an exception?

Econ 101b_ Fall 2003_ The Erosion of Okun_s Law_ Archive Entry From Brad DeLong_s Webjournal.png

I am not sure, but it happened in the last recession as well. As I wrote back in 2003:

Things have been different, however, in this recession (and to a lesser extent in the preceding early-1990s recession). The standard relationship between output growth and hours worked has gone substantially awry. See that branch poking out of the scatter diagram on the left side? That's the most recent data. (The smaller twig pointing out below and to the left of the branch is from the early-1990s recession and recovery.)

The fact that falling hours have been accompanied by rapidly-rising productivity is what has given us not a jobless recovery but a massive job-loss recovery. The normal pattern we would expect from the past two years' output growth would be that employment and hours would have been nearly flat. Why the different pattern this time? We think that it is because firms are no longer "hoarding labor" when times are slack because the industries losing jobs no longer expect employment to bounce back.

This means that we no longer have any confidence that we understand the cyclical pattern of productivity growth--which means that we have little ability to translate the (high) productivity growth numbers we see into information about what the underlying long-run trend growth rate of the economy is.

Why is this? Why have firms changed their behavior? Let me turn the mike over to Erica Groshen and Simon Potter of the New York Federal Reserve Bank:

Erica Groshen and Simon Potter (2003), "Has Structural Change Contributed to a Jobless Recovery?" (New York: Federal Reserve Bank of New York): The sluggishness of payroll growth during the 1991-92 and current recoveries stands in sharp contrast to the vigorous rebound in employment during earlier recoveries (Chart 1). To be sure, these earlier recoveries had rocky moments, with occasional jobless intervals. At the start of any recovery, many employers will delay hires or recalls for a time to be certain that the increase in demand will continue. Nevertheless, although the job market resurgence in the past may often have lagged the output recovery by one quarter, only during the two most recent recoveries has the divergence between job and output growth persisted for a longer period. The divergent paths of output and employment in 1991-92 and 2002-03 suggest the emergence of a new kind of recovery, one driven mostly by productivity increases rather than payroll gains....

Recessions mix cyclical and structural adjustments. Cyclical adjustments are reversible responses to lulls in demand, while structural adjustments transform a firm or industry by relocating workers and capital. The job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid-off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes, however, are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job. A preponderance of structural--as opposed to cyclical--adjustments during the most recent recession would help to explain why employment has languished during the recovery. If job growth now depends on the creation of new positions in different firms and industries, then we would expect a long lag before employment rebounded....

The difference from the pattern of the early 1980s is quite stark: now, the industries cluster heavily in the two structural quadrants. Most of the industries that lost jobs during the recession—for example, communications, electronic equipment, and securities and commodities brokers—are still losing jobs. Balancing the structural losses of these industries, however, are the structural gains of others. For example, nondepository financial institutions, an industry grouping that includes mortgage brokers, added jobs during both the recession and the recovery...

It used to be that labor productivity was procyclical: businesses would hold onto workers in downturns even when there wasn't enough for them to do--would put them to work painting the factory--because the match between businesses and their skilled, experienced workers was valuable, and businesses did not want to see their skilled, experienced workers drift away in a temporary downturn and then have to go through the expense and loss of training new ones. We know this because when the overall unemployment rate rose higher, and so there were fewer places for laid-off workers to drift off to, labor productivity became less procyclical.

That era is over. (Well, there is still a very small sign of it in manufacturing.)

These days U.S. labor productivity looks to be countercyclical: firms take advantage of downturns in demand to rationalize operations and increase labor productivity, pleading business necessity in the face of the downturn to their workers.

It seems fairly clear to me that calling this "structural change" is somewhat of a misnomer. Structural change is when workers find jobs in expanding industries. That happens overwhelmingly during booms. For workers to lose jobs in contracting industries and to not find them in expanding industries is not "structural change" but rather something else.

If we were to pump up demand we would pump it up in expanding industries, and so accelerate rather than obstruct labor reallocation.