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Thursday, December 6, 2012

Job Recovery after the Great Recession: It's Different This Time


On the following unemployment chart, it appears that the 2008 recession was no different than earlier recessions.  There is the same saw-toothed pattern on the unemployment chart as seen in earlier recessions.   But a closer look at the data reveals some troubling issues with the recovery.    It is indeed different, this time.

In terms of job recovery and GDP growth, the “Great Recession” of 2008 was deeper and longer than any other recession since World War II.    Recovery from the 2008 recession continues to be weak, and is unlikely to restore either employment or GDP to pre-recession trends before the next recession.

The rate of job recovery after recent recessions has been weaker than following earlier recessions.   The weakness is seen clearly in three recessions since 1990, and may indicate structural changes in the economy.   A closer look shows that the recent weakness is part of a longer-term trend; job recovery following recessions has been declining since World War II.
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Let’s look at some graphs.

Employment Recovery from the 2008 Recession

The most striking thing about the current recovery is that employment has not recovered to pre-recession levels, even three and one-half years after the official end of the recession.    Another interesting observation form this chart is the progressive change in the shape of the recovery from the 1981 recession to the 2008 recession.   Employment recovery from each successive recession is slower, as indicated by flatter curves following the bottom of the recession.
Here is another chart showing the depth and duration of the 2008 employment recession.   Job losses and recovery are measured in percent of peak employment prior to the recession.    Recoveries from the 1990, 2001, and current recessions are flatter and broader than following earlier recessions.
A time-series chart also shows the depth and duration of employment recessions since 1959.  Recent recessions are broader, showing a slower recovery of jobs than after earlier recessions.
Long-term unemployment is dramatically higher than at any time since World War II. 
Not surprisingly, the quality of jobs has also deteriorated, with higher numbers of workers accepting part-time rather than full-time unemployment.

GDP

Persistent unemployment has been a drag on GDP.    Although GDP is now increasing at about the same rate as before the recession, there is a gap of about $1 trillion between actual GDP and potential GDP, as calculated by the Congressional Budget Office. 

 A graph presented by the Washington Post shows the growth rates required to restore GDP to the previous trend.  At growth rates of only 2%, the gap will not close.   Bill Gross, recognized as one of the brightest financial experts of our times, recently stated that he expects that 2% growth and persistent unemployment are the “New Normal” for the United States economy.
The entire WP slide show is worth seeing:  http://www.washingtonpost.com/wp-srv/business/the-output-gap/index.html

Structural Change in the Economy

We’ve seen how job recovery after recent recessions has been weaker than following previous recessions, indicated by flatter curves in figures 1 &2.    Let’s look at another presentation of figure 2, centering the curves on the bottom of the job recession.  
 All recessions prior to 1981 had full job recovery in less than 11 months; the latest three recessions have flatter recovery profiles, and require much longer to reach full recovery.    If we calculate the rate of job recovery (slope of the positive line) from the chart above, we see a long-term trend.    The rate of job recovery following recessions has been in a secular decline since World War II.  
 This trend would seem to indicate a progressive structural change in the economy since World War II.  Jobs which disappear during recessions are becoming harder to replace.  The manufacturing sector, the workhorse of the American economy is shrinking.  Manufacturing jobs are disappearing as work is outsourced overseas and American factories are increasingly automated.  New jobs are increasingly sophisticated, and time for workers to acquire specialized training and skills, leading to the progression we have seen in job recovery following recessions.
The Hamilton Project created a useful interactive graphic showing the jobs growth and time required to return the country to full employment.   The graphic allows the viewer to choose a rate of job growth, and see the time required to recover jobs lost in the recession.   Data from the most recent Dept. of Labor shows that employment growth averaged 153,000 jobs/month in 2011, and 157,000 jobs/month so far in 2012.   If we assume a long-term trend of 155,000 jobs/month, and place this data in the Hamilton Project calculator, we see that the jobs gap will not close before the year 2025.  I recommend trying a few scenarios on this interactive calculator (http://www.hamiltonproject.org/jobs_gap/).

The most recently reported jobs growth is 146,000, for November 2012; October jobs were revised downwards from 171,000 new jobs to 138,000 jobs.  It's clear we are falling short of the 220,000 jobs needed to restore jobs lost in the recession by the year 2020.
The average interval between recessions since WWII has been 5 years, 9 months; the maximum interval between recessions was 10 years, between 1990 and 2000.   We are already 3 years and 6 months past the official end of the Great Recession.  Considering the very real economic headwinds facing the nation, It is extremely unlikely that we will restore the jobs lost in the Great Recession before the beginning of the next recession.  The job recovery following the 2008 recession is indeed different, this time.
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References and Credits:

Charts prepared by the blogger at http://www.CalculatedRiskBlog.com were especially helpful in preparing this blog post.

Charts at these sites were also particularly useful in providing insights into the 2008 Recession recovery.:
    The Washington Post graphic "Why it doesn't feel like a recovery"
    Hamilton Project jobs creation graphic
    The Center for Policy Priorities, The Legacy of the 2008 Recession: Chartbook


2008 Recession recovery
GDP loss during the 2008 recession is deeper than previous recessions; recovery after recession slower than previous recessions.
“Why it doesn’t feel like a recovery”
Jobs Creation Interactive Graphic;  Most recent data:  October, 171,000 jobs added
 Women in Workforce

Recession unemployment rate by demographics; NYT interactive graphic
Unemployment graph by different recessions
US Labor Demographics and Forecast
Urbanomics Blog: Job Growth, charts, etc.
Bill Gross interview; the “New Normal” for the US economy is 2% growth and persistent unemployment.  Workers, already displaced by cheap Asian labor, are now being replaced by machines.
US GDP growth in 2012 Q3 was 1.9%, excluding Inventory growth.               
Employment growth averaged 153,000 jobs/month in 2011, and 157,000 jobs/month so far in 2012.


November job growth is 146,000; October jobs revised downward from 171,000 to 138,000.






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