A Sensible Explanation for the “Jobless Recovery”

Corporate profits are very high, while unemployment remains high. Why aren’t businesses hiring more? Because they don’t think they need to.

 

Lots of theories are floating around about why big businesses are “hoarding” money derived from historically high profits instead of investing that money in growing their businesses through hiring. An article by Timothy Noah called “Why This Particular Recovery is So Bad at Creating New Jobs” explains this conundrum in a particularly clear and rational way. Here is a summary:

  • Even though it’s been four years since the official end of the recession, and we are in some kind of recovery, the unemployment rate is still above 7% and is only expected to inch down very slowly
  • During “normal” recoveries the U.S. economy has quickly created jobs, but not during this one.
  • Part of the problem is that the economy has been growing very slowly—GDP (gross domestic product) growth has been anemic during this recovery—averaging about 2 percent compared to “a normal recovery [which] would have started out with growth closer to five percent before falling perhaps to three percent.”
  • But during the recoveries after the previous two recessions (1990-91 and 2001), GDP growth did not create jobs as much as during earlier recoveries. Maybe “the economy is learning how to grow without creating jobs—or at least without creating nearly as many as it once did.” There are three “standard explanations”:
    • Given the monumental hit to the economy caused by the banking/residential mortgage/home devaluation crisis, “the government simply never provided enough economic stimulus to revive the recession-wracked economy.”
    • The move “toward policies of austerity—like the recent uptick in the payroll tax, which removed an estimated $115 billion out of workers’ paychecks, and the $85 billion in budget cuts that came with “sequestration” earlier this year—has created what economists call “fiscal drag” on the economy.”
    • Recovering from a banking crisis is harder than from an ordinary recession, because housing values stay depressed longer, so economic growth occurs more slowly, resulting in slower employment growth.
  • There’s a paradox that gets resolved in every recovery: “businesses are reluctant to invest their record profits in new workers…  because they aren’t convinced people can afford to buy the goods and services they sell. Too many of them are unemployed!” This paradox is taking forever to get resolved during this recovery. But what is different now?
  • One interesting theory that the article’s author doesn’t give much credit to—for lack of hard data—is that

automation is finally reducing the size of the workforce, just as dystopians have been predicting for a century. Ordinarily, productivity growth through technological innovation actually increases employment, because more output creates more wealth, which creates more worker demand. Automation eliminates certain jobs, sure, but as the economy grows other jobs are created.  … . That’s the way it’s worked thus far. But it’s no longer true, according to [an] argument [that] boils down to the observation that growth in productivity—economic output per total hours worked—and growth in employment stopped rising in tandem at the start of this century. Robots, in other words, have started to eliminate more jobs than they’re creating.

  • A better theory, according to the author, is one by Princeton economist, Alan S. Blinder, comes from the fact that for the first time in “postwar history,” “government employment declined during a recovery.” Most government employees are state and local ones. Usually as tax receipts rise during a recovery, these state and local governments rehire employees that they had to let go during the recession. But now, in 2010 and 2012 Republicans achieved and maintained “a level of GOP dominance in state politics not seen since the 1950s.” That, along with the reality that “state legislatures… have gotten more polarized ideologically,” resulting in “pitched battles over public-employee unions, taxation, and the size of government.”
  • But the theory that this article’s author finds the most plausible is one by Harvard economist, Richard B. Freeman, which closely compares and contrasts the recessions of the 1950s through 1970s to the ones since then, especially as to employment and productivity. In the earlier recessions

 firms held onto their workers—not because they were softhearted but because “they expected short recessions and wanted experienced workers on board to work in the recovery.” And since the employees who weren’t laid off had less work to do in a down economy, output shrank.

That pattern started to change—and ultimately flipped on its head—Freeman argues, after the 1970s. Instead of decreasing during recessions, productivity (i.e., output per worker) started increasing during them.  … . In modern downturns, fewer and fewer workers do more and more work.

In turn, Freeman writes, recoveries have become more “jobless,” with rebounds in employment increasingly lagging behind rebounds in GDP. Freeman suggests this change is the result of declining union power and a growing tendency to “lay off workers first and ask questions later.” Why worry, after all, if the result is rising productivity?

Mr. Noah concludes his article:

One possible explanation, then, for why this recovery is so bad at creating jobs is that businesses are more resistant than they used to be to hiring, period—and that they can afford to be because unemployment takes less of a toll on GDP growth than it once did. An anti-employment stance by American business would not appear a successful long-term strategy, since at some point unemployment really is bound to be an impediment to economic growth. But if it’s not as big an impediment as it used to be—and if corporate profits are already sky-high anyway—then perhaps American business has become less impatient to reach full recovery. A poky one might do just fine.

 

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