Unemployment during recovery: up, down, sideways?
by John B. Hagens
John has been with IPR since 1990, with activity in all of IPR's businesses. Prior to joining IPR, John was senior vice president for the WEFA Group, with responsibility for the company's U.S. economic forecasting service. Before his ten-year stint with Chase Econometrics (and then WEFA), John had jobs as senior economist for the Carter Administration's Council on Wage and Price Stability and for the Social Security Administration, the latter under a Brookings Institution Economic Policy Fellowship awarded while he was an economics professor at Colby College. John holds an undergraduate degree in mathematics and economics from Occidental College and a Ph.D. in economics from Cornell University.
Unemployment during recovery: up, down, sideways?
Today's report from the Bureau of Labor Statistics (9.7% unemployment rate, 36,000 non-farm jobs lost) suggest that the U.S. economy is currently in a holding pattern in terms of job growth and unemployment. One might have expected that the surprisingly strong GDP growth of 5.9% in the fourth quarter of last year should have produced a pickup in job growth in the early months of 2010. That is not happening and it is worthwhile to look at the patterns of recovery in previous recessions in the U.S.
Needless to say, every recovery from recession is unique. The causes of recessions vary widely and include factors such as supply-shocks (quadrupling of oil prices in 1973, which was equivalent to a large, depressing tax increase), monetary tightening to fight excessive inflation (Volcker's 1980-81 interest rate hike), and bubble bursts (tech and housing) that hit wealth as well as confidence. And policies to combat recession, if any are put in place, differ across time with some relying more on monetary policy and others on fiscal policy. Some recoveries, especially ones coming after deep recessions, are swift. Others, sometimes called jobless recoveries, are painfully slow. Consider the two deepest post-war recessions in mid-1970s and the early 1980s. Twenty-four months into their recoveries the unemployment rate dropped sharply. In the first two years of the recoveries, the unemployment rate dropped 2.0 percentage points from its peak in May of 1975 and 3.6 percentage points from its peak in November of 1982. On the other hand, the unemployment rate actually increased slightly in the first twenty-four months of recovery from the 1991 recession. There was no change in the unemployment after two years of recovery from the 2001 recession.
With such a mixed historical pattern which is not well understood, there is obvious uncertainty about the current recovery. Will unemployment fall rapidly and follow the pattern of the two post-war recessions that were deep like the current one? Or will unemployment barely fall, or even rise, like the last two recesions? One common element of all recent recession/recovery periods is the pattern of productivity growth. Generally, productivity growth accelerates in the last few quarters of a recession and peaks very near the quarter in which GDP growth turns positive and the recovery begins. This isn't surprising. Because hiring and firing costs are non-trivial, many firms carry more workers than they can productively use during recessions and measured productivity falls. When demand picks up, these under-utilized employees go back to productive activities and productivity rises. This pattern is pronounced. Observe productivity growth in the GDP "turn" quarter (column labeled 0) in the top part following table. In every single recessions since 1970 productivity growth exceeded 5%.
Another very important pattern can be seen in the middle part of the table: productivity growth declines from its "turn" quarter level in virtually all of the subsequent recovery quarters. Larger drops in productivity growth, for any given rate of GDP growth, translate into larger increases in hours, jobs, and decreases in the unemployment rate. In a previous note it was speculated that GDP growth might average approximately 4.5% during the current recovery period. If productivity growth falls dramatically from its lofty levels over the last three quarters, say by the amount it fell in the 1973-75 and 1981-82 recessions, then job growth would average a relatively healthy 2.5% and the unemployment rate will drop. If productivity growth follows the pattern of the last two recoveries, then even with 4.5% GDP growth job growth will be anemic at best and the unemployment rate might easily rise.
