Blog Post

The lost employment decade

What’s at stake: Despite signs of economic recovery, unemployment will rise further in 2010 and remain high in the near future in most OECD countries. If the recovery fails to gain momentum, the OECD forecasts in its latest Employment Outlook that unemployment rate could approach a new post-war high of 10%, with 57 million people […]

By: Date: October 1, 2009 Topic: Global Economics & Governance

What’s at stake: Despite signs of economic recovery, unemployment will rise further in 2010 and remain high in the near future in most OECD countries. If the recovery fails to gain momentum, the OECD forecasts in its latest Employment Outlook that unemployment rate could approach a new post-war high of 10%, with 57 million people out of work. The ILO warns a jobless recovery would be neither socially nor politically sustainable.

The Economist’s Free Exchange blog says the difficult reductions in unemployment are likely to come, as they did last time around, from about the 6.5% level downward. There we meet the workers affected by structural dislocations, or rendered unhirable by long absence from the labour force. And it is there that the Fed will have to make some difficult decisions, namely, is it worth continuing to accommodate, even if that means that inflation of either a bubble or prices may result.

Felix Salmon reports that Lawrence Katz and Ned Phelps have diagnosed significant upwards move in Nairu (potentially up to 7%), the rate of unemployment below which inflation starts kicking in – or, to put it another way, the level of unemployment which the Fed should consider to constitute “full employment”. According to Mohamed El-Erian, lower labour mobility, the elimination of activities that were facilitated by turbo-charged and unsustainable Wall Street credit factories, industries that are experiencing a major size reset after a period of over-expansion, an erosion of skills as people are unemployed for longer, and the ongoing re-alignment of the global economy in the context of overall over-capacity are factors contributing to the increase in the Nairu.

The New York Times’ Economix blog reports that two Rutgers professors predict that it will take more than seven years to restore the health of the US’ labour market to prerecession levels. Even if the nation could add 2.15 million private-sector jobs per year starting in January 2010, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, to eliminate the jobs deficit! Those hoped-for 7.63 years of consecutive job growth would be about 50 percent longer than the average length — 58 months — of every economic expansion since World War II. Another paper from the Kansas City Fed makes a similar argument.

The Financial Times’ Money Supply blog says with such a large decline in labour productivity, companies in Europe will be able to increase production for a long time without hiring. The post points to a graph from the latest WEO which shows the relationship between lost output and unemployment in previous cycles and compares it what has happened this time. The chart shows that this recession is much worse around the world than other downturns in terms of lost output, but that unemployment rises have been similar or smaller than in other recessions, hence the dramatic reduction in labour productivity. The US is an exception with a much more rapid increase in unemployment and a modest decline in output.

Jon Robertson of the Atlanta’s Fed Macroblog looks at the relationship between the timing of a recession’s end, the peak in the unemployment rate and the beginning of policy tightening in the face of a particularly weak US job market report. There is considerable variation in how long it takes for the unemployment rate to move lower after the economy enters recovery mode. But, historically, the beginning of a tightening cycle has lagged behind the peak in the unemployment rate by many months. This pattern is true for expansions when the FOMC was felt to have done a poor job in managing inflation, such as the post-1975 period, and it is equally true for periods when the Fed is believed to have done a very good job of managing inflation, such as the post-1991 episode.

David Leonhardt points out that wage growth has picked up for those with jobs! You don’t hear or read nearly as many stories about pay cuts these days. Even though unemployment has reached its highest level in 26 years, most workers have received a raise over the last year. That contrast highlights one of the more overlooked features of the Great Recession. In the job market, at least, the recession’s pain has been unusually concentrated. Inflation-adjusted pay is up 2 to 3 percent. Amazingly enough, that’s almost as big as the peak increases during the late 1990s boom.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


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