Thursday, March 18, 2010

When Will "Full" Employment Come Again?

The most telling sign that the United States is well down the road to ruin is the jobs situation. I'm about to tell you some seriously depressing stuff, so get ready.

Let's look back to the first post-Bubble Collapse recession, that of 2001-2002. Unemployment is said to be a lagging indicator, meaning jobs growth returns more slowly than growth in other indicators once a recession has ended. For example, housing starts have always been a leading indicator of recovery, as Calculated Risk has pointed out many times. Here is the Congressional Budget Office (CBO) report on what happened with jobs in the early aughts.

Employment falls during economic recessions and typically begins to rise shortly after economic activity starts to recover. During the recession of 2001, which according to the National Bureau of Economic Research lasted from March until November, job losses totaled about 1.6 million, or 1.2 percent of the pre-recession level of employment. That loss was roughly comparable to the average rate during previous recessions, even though the recession was mild in terms of its effect on gross domestic product (GDP). After the recession, when economic activity picked up noticeably, employment continued to decline, by an additional 1.05 million jobs over the next year and a half—prompting some commentators to characterize the period as a “jobless recovery” (see Figure 1).

When Will Full Employment Come Again?

As you can see in Figure 1, the typical lag for jobs growth is about 3 quarters (9 months) after the trough (end of the gray bar). But in 2001, employment continued to decline for a year and a half after the official end of the downturn. And of course, only 2.6 million jobs altogether were lost over the course of that earlier recession and recovery. Here are the current cold hard numbers as of January, 2010—

14.8 million unemployed3.8 million want a job but are not considered unemployed because they have not looked in the past four weeks8.3 million have a part-time job, but want a full time job

As of early February, the "official" numbers say that over 8 million jobs have been lost since the "Great" recession began in December, 2007. Let's assume, along with the Federal Reserve but not (yet) the NBER, that the recovery began in the 3rd quarter of 2009. That would put us squarely in the"lag" period of continuing job losses just as occurred in the 18 months following the 2001-2002 recession. Indeed, unemployment claims are increasing (or at least not dropping much lately).

When Will Full Employment Come Again?

From Mish's Weekly Unemployment claims jump to 496,000; Will reality set in soon?

Now, let us define "full" employment as 5%, which is what it was at the beginning of the "Great" recession. Back in October, 2009, the Wall Street Journal asked the pertinent question: how long it will take to regain the job levels at the start of the recession?

When Will Full Employment Come Again?

would have taken until the end of 2016 to achieve full employment, but only if the economy had begun adding jobs in October, 2009 at a furious pace well above the ~125,000 new jobs we need every month just to keep up with population growth (new entrants into the job market)

Although "official" jobs losses have been small in recent months, these are still job losses, not job gains. In other words, based on the 2001-2002 experience—this is a very generous assumption—we might expect job losses to continue throughout 2010 if the recovery did indeed start in the 3rd quarter of 2009. 

Thus it will not be 2016 when we return to "full" employment. Each month we lose jobs, even if that number is relatively small, postpones by another month that happy time when the economy starts adding jobs month in and month out. And as John Mauldin pointed out in Welcome to the New Normal, we would have to add jobs at an unprecedented, unrealistic pace to approach full employment by (in his article) 2014.

So when will "full" employment come again? Certainly not by 2016, and it's looking more and more like it will be much later, 2017 or 2018 at best. That's 7 or 8 years down the road. And there's a more depressing answer that depends on devastating future economic events that seem more likely every day. That answer to the question of when we will regain "full" employment is Never.

I'm sorry.


I have just run across a rosy forecast for unemployment in the Joint Statement of Timothy F. Geithner, Peter R. Orszag, and Christina D. Romer. This official White House/Treasury estimate was presented to the Committee on the Appropriations of the U.S. House of Representative. Statements of interest are highlighted in red—

Employment and unemployment.  In terms of the labor market, the forecast projects average job growth of about 100,000 per month in 2010, about 200,000 per month in 2011, and about 250,000 per month in 2012.Typically following a recession, we see increases in productivity, temporary employment, and the length of the workweek before employment begins to recover.For the most part, developments in recent months have been following this pattern.Productivity growth has surged; temporary help employment has risen for 5 consecutive months; and the workweek has been generally rising.  We expect to begin seeing job gains by sometime this spring.

Because of normal growth in the population and the fact that some
workers are likely to reenter the labor force as the economy improves, it typically takes employment growth of somewhat over 100,000 per month to bring the unemployment rate down.  Because we do not expect job growth substantially over 100,000 per month over the remainder of the year, we do not expect substantial further declines in unemployment this year.  Indeed, the rate may rise slightly over the next few months as some workers return to the labor force, before beginning a steady downward trend.It is also worth noting that the productivity growth we have seen in the last three quarters is the fastest in nearly 50 years.  This rapid growth in output per hour has allowed firms to raise production without hiring additional workers.  This record pace of productivity growth almost certainly will not be maintained much longer, implying that further increases in output will require additions to the labor force.

As the pace of job creation picks up in 2011 and 2012, there is likely to be greater progress in reducing unemployment.  Nonetheless, because of the severe toll the recession has taken on the labor market, the unemployment rate is likely to remain elevated for an extended period.  The forecast projects that in the fourth quarter of 2011, the unemployment rate will be 8.9 percent, and that by the fourth quarter of 2012, it will be 7.9 percent.

Allow me to quote from my Paul Krugman's Free Lunch Theory, which cites John Mauldin's paper—

In Welcome to the New Normal, John Mauldin analyzes past jobs data to determine how many jobs the economy must add each month to get to 5% unemployment by 2014.

Let’s assume that we would like to get back to a 5% unemployment rate. That would not be stellar, but it would certainly be better than where we are today. Five percent unemployment in late 2014 will mean 8.1 million unemployed. To get to 5% unemployment we will have to create 14 million jobs in the five years from 2010-2014. (163 million in labor pool minus 8 million unemployed is 155 million jobs. We now have 139 million jobs, so the difference is roughly 15 million.) Plus the equivalent of 3 million jobs that Rosenberg estimates, just to get back to an average work week. And maybe the extra 1.5 million a year I mentioned above.

But let’s ignore those latter jobs and round it off to 15 million.
Let’s hope that by the beginning of next year we stop losing jobs. That means that to get back to 5% unemployment within five years we need to see, on average, the creation of 250,000 jobs per month. As an AVERAGE!!!!!

[My note: look at Mauldin's complex analysis to get the full context of the quote.]

And has the economy ever added an average of 250,000 jobs per month in any of the last 10 years? NO!!!!!

If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the ten years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best ten years I could find, which would be 1991-2000, the average is still only 150,000. That is a long way from 250,000.

The best year, 2006, averaged 232,000 jobs added per month—that was the top of the Housing Bubble. The best decade, 1991-2000, averaged 150,000 jobs added per month. And yet the official forecast from the White House & the Treasury asserts we will add an average of 200,000 jobs per month in 2011, and 250,000 jobs per month in 2012. These extraordinary job gains, which are unprecedented in recent decades, would still leave us with unemployment at about 8% in the last quarter of 2012.

I rest my case.

UK new car sales and the recessionJobless rate high but steady at 10.7 percent

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