jpmorgan jobless recovery
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8/7/2019 JPMorgan jobless recovery
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Economic Research
Global Data WatchSeptember 24, 2010
1
JPMorgan Chase Bank, New York
Michael Feroli (1-212) [email protected]
US jobless recoveries: what wenow know and still don’t know• The labor market recovery from the 2007-2009 reces-
sion bears similarities to the past two recoveries
• One hypothesis for this is structural change that has
made businesses more cautious
One year ago, as the current recovery was just getting un-
der way, we published a note (“Jobless recoveries, what we
know and don’t know,” GDW , September 4, 2009) that sur-
veyed theories of jobless recoveries in order to gauge the
prospects for the labor market in the year ahead. At thattime, there were two broad sets of explanations for the job-
less recoveries that followed the 1991 and 2001 recessions.
One set focused on the shallowness of those recessions,
which created only a modest bounce-back in growth and
labor market activity. The other set of explanations looked
to structural changes that may have taken place in the
economy in the 1980s or since that may have changed the
shape of business cycles.
Defining jobless recoveries
The current recovery certainly wasn’t shallow, yet by some
measures it is shaping up to be a jobless recovery. Probably
the simplest measure of a jobless recovery is net change in
jobs since the end of the recession. Currently, private non-
farm employment, total nonfarm employment, and the
household survey measure of civilian employment all stand
below where they were at the end of the recession in June
2009. By this straightforward standard, the US is experi-
encing its third consecutive jobless recovery.
A recurrent concern is that the term “jobless recovery” may
simply mean a slow-growth recovery, with no labor market
feature that is particularly unusual. In order to mitigate this
concern, we look at job growth relative to GDP growth
(second chart) in order to control for the strength of the re-covery. When looked at in this way, the behavior of the
labor market in recoveries still exhibits a sharp break in the
mid-1980s. Prior to then, employment grew at about half
the rate of GDP in the first year of recovery. Since then,
employment has contracted in the first year even as GDP
has grown. Of course, there is a complex web of interac-
tions between overall economic growth and job growth, but
even controlling for GDP growth, there seems to be a shift
in labor market behavior in the 1980s that persists in the
current recovery.
Economic Research Note
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100
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106
108
-10 -5 0 5 10 15 20
Months from trough
Private nonfarm payrolls around recession troughTrough employment = 100
1982
1975
1991
2001
2009
-40
-20
0
20
40
60
80
%
First year of recovery employment growth rate as % of GDP growth rate
'49 '58 '70 '82 '01'54 '61 '75 '91 '09
Another way of comparing the current labor market recov-
ery to previous jobless recoveries is to look at the gross
flows in the labor market. (Gross flow data are available
for only the last two decades, but a widely used method
introduced by Rob Shimer at the University of Chicago es-
timates implied flow data from the household survey.) The
third chart plots the probability an employee is separated
from his job (a proxy for firing) and the probability an un-
employed person finds employment (a proxy for hiring).
Relative to recoveries prior to the mid-1980s, there is noth-
ing unusual about the job separation probabilities in the job-
less recoveries, or in the current recovery for that matter,
indicating that businesses have not stepped up firing in the
past three recoveries. In contrast, the job finding probability
has been significantly lower in the past three recoveries rela-
2.0
2.5
3.0
3.5
4.0
4.55.0
72 77 82 87 92 97 02 07
10
20
30
40
50
60
%, both scales
Probability of finding or losing a job
Probability employed
person loses jobProbability unemploy ed
person finds a job
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Economic Research
US jobless recoveries: what we now know andstill don’t knowSeptember 24, 2010
JPMorgan Chase Bank, New York
Michael Feroli (1-212) [email protected]
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0.8
0.9
1.0
1.1
1.2
1.31.4
1 3 5 7 9 11 13 15 17 19 21 23 25
Index, trough=1
Job finding probability
Range of 6 prior post-WWII recoveries
2001
Months after trough
19912009
0.7
0.8
0.9
1.0
1.1
1 3 5 7 9 11 13 15 17 19 21 23 25
Index, trough=1
Job separation probabil ity in recoveries
1991
Range of 6 prior post-WWII recoveries
Months after trough
20012009
tive to prior post-war recoveries. For whatever reason, firms
appear much more reluctant to hire in jobless recoveries, and
the current recovery fits right into this pattern.
Explaining jobless recoveries
Given that the current recovery seems to fit most definitions
and share most characteristics of jobless recoveries, the shal-
low recession explanation of jobless recoveries is much less
persuasive. Why then has every recovery since the mid-
1980s produced no job growth in the first year of the expan-
sion, even controlling for the vigor of the overall economy?
And why has hiring been relatively weak even as layoffs
have followed the path of previous recoveries?
Of course there are idiosyncracies in each recession—the
S&L issues in the 1990s, the Iraq War uncertainties in the
2000s, the deleveraging process today—and so the appar-
ent trend toward jobless recoveries could be merely a string
of bad luck. While this is possible, the consistent experi-
ence of job-full recoveries before the mid-1980s and job-
less ones since then is striking. In last year’s note, we dis-
cussed the various explanations put forward by academic
economists. To recap, the explanations were few, were
generally not compelling, and become even less compelling
when forced to also explain the current jobless recovery.
Structural changes in the US economy surely did take place
in the mid-1980s. The “Great Moderation” in the volatility
of economic activity—which seems to have survived the
Great Recession—is often dated to the mid-1980s. Associ-
ated with that is a shift in inventory behavior such that
firms’ stockbuilding is less procyclical. More generally,
firms are often reported to have become more cost-con-
scious in that period, whether it was just-in-time inventory
management, EVA, lean manufacturing, etc. The problem
economists have with this explanation is that it seems to
imply that before the 1980s, firms were leaving profits on
the table by not cutting costs to the fullest extent possible.
While economists assume a profit maximization motive for
firms, the starting point in the study of corporate finance isthe observation of a separation between ownership and
control: the profit-maximizing objective of shareholders
may conflict with the empire-building or other objectives
of executives. The mid-1980s ushered in an era of more
contested markets for corporate control. While the hostile
takeover tactics of that decade have subsided, corporate
finance theorists are in general agreement that the legacy of
that period is fundamentally changed governance struc-
tures: private equity, LBOs, MBOs, heightened merger ac-
tivity, increased incentive compensation for executives, and
other mechanisms have emerged since the 1980s as means
to align the interests of ownership and management. The
reorienting of executive focus from empire-building to
profits may have created more reluctant hiring early in re-coveries. Of course, this explanation is conjectural.
If jobless recoveries are an enduring feature of economic
recoveries, the implications are not entirely bleak. While it’s
obviously nice to experience robust job growth coming out
of recession, the two prior jobless recoveries eventually—
within two or three years—became job-creating. They also
became long expansions. While the last expansion did not
end well (to put it mildly), that owed more to household fi-
nancial imbalances than to business sector fatigue.
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Five-year rolling standard deviation of outpu t growth
The Great Moderation
60 65 70 75 80 85 90 95 00 05 10