July 28, 2003

The Wedge Between Output and Employment Growth

Alan Beattie of the Financial Times writes about the productivity-boom generated wedge between output growth and employment growth. I would be surprised if there were any employment growth at all in America over the next year unless real GDP growth exceeds 3.5% per year...

FT.com Home US: After two years in which the American economy has faltered and sputtered, there is renewed hope in the administration of President George W. Bush that it is at last accelerating towards cruising speed. More than goods or services, the improvement he and his team want to see most as a result is in jobs. Like his father, Mr Bush has presided over a jobless recovery. Two years after the 2001 recession, private sector employment has fallen by more than 2.5m. The unemployment rate, at 6.4 per cent, is more than 2 percentage points higher. Larry Mishel, president of the left-leaning Employment Policy Institute, calls it "the greatest contraction in private sector employment since the Great Depression"....

While the lack of a recovery of employment superficially resembles what happened during the climb out of recession in the early 1990s, the root cause is a little different. Then, companies were slower than expected to hire workers, given the underlying strength of the economy. By this point in the recovery, employment was well on the way to bouncing back. This time round, a new and more persistent factor threatens the economy's ability to create jobs: the late-1990s surge in productivity, or output per worker, which shows few signs of abating. Growth in output per hour among non-farm businesses averaged more than 4 per cent last year. Even Alan Greenspan, chairman of the Federal Reserve, who was one of the earliest advocates for the idea that productivity growth had shifted up to a higher trend rate, said last week he was a little surprised at how strong it had been throughout the economic slowdown.

Fears that productivity growth in the early months of the slowdown was a temporary "productivity bubble", caused by companies cutting workers faster than their output fell, have not been vindicated. Martin Feldstein, a Harvard professor and president of the NBER, says: "The productivity gains are not an artefact of the recession." The US economy has been growing so far this year at a rate of 1-2 per cent, which would have been considered a reasonable performance in continental Europe or in the US in earlier generations. But companies are finding they can raise output at this pace with fewer workers. While technological innovation may not continue at the pace it set in the 1990s there seems plenty of potential for its dissemination throughout the economy. Moreover, anecdotal evidence collected by the Fed suggests that with company order books less full than before, managers have time to squeeze out inefficiencies that were allowed to survive in the hectic days of the late-1990s boom...

Posted by DeLong at July 28, 2003 09:23 PM | TrackBack

Comments

While I'm normally a pessimist, anecdotally the job market is turning around, at least in the tech industry. People I know who literally had no jobs to apply for, are now seeing jobs they qualify for.

Posted by: Walt Pohl on July 28, 2003 10:17 PM

A serious part of the problem is that we exported those jobs. They aren't gonna come back.

Posted by: Chuck Nolan on July 29, 2003 05:01 AM

The "Economist" like a lot of other publications versed in the review of economic data, likes to look at private jobs. Private employment demand is one reasonable barometer of private sector health. This misses the chunk of US employment tied up in the public sector - roughly 17%, if I got the math right. I take government employment to fit best into the "cause" column in the first look at what is going on in the economy, rather than "effect". It is a factor over which policy makers have some control. So far this year, government employment at all levels is down 67,000. Wrong direction.

Brad, you have offered the assessment on many occassions that 3.5% GDP growth is needed to assure job growth (do you mean a falling jobless rate? - are you putting productivity growth at 2.5% or 3.5%?). That begs the question - how fast to you think the US economy will grow?

Posted by: K Harris on July 29, 2003 05:13 AM

Chuck:

I don't agree with what appears to be a trade protectionist sentiment in this assertion that U.S. companies exported jobs. Yes, companies wiil invest in factories that have the lowest per unit cost of production. While it is true that other nations may have lower wage rates, unit labor costs equal wages divided by labor productivity. And if American labor maintains a sufficient productivity advantage, we can maintain both high wages and a comparative advantage. But then productivity growth requires investment in new plants here. Since our national savings is near zero, we don't invest but it turns out foreigners are investing in U.S. factories. Evidence? The enormous current account deficit.

Posted by: Hal McClure on July 29, 2003 05:30 AM

"While I'm normally a pessimist, anecdotally the job market is turning around, at least in the tech industry. People I know who literally had no jobs to apply for, are now seeing jobs they qualify for."

I'm not so sure, Walt. You can't get a more pro-Bush site than FreeRepublic and I've been simply stunned by the amount of criticism there's been in the last few weeks over current economic conditions. I'd say employment fears top the list of beefs with Bush's failure to rein in spending coming in a very close second. There is a lot of talk about Bush failing to be re-elected.

Incidentally, Bush's Mideast policies are winning him few friends and quite a number of enemies.

Posted by: Pooh on July 29, 2003 07:14 AM

Hal McClure:
"it turns out foreigners are investing in U.S. factories. Evidence? The enormous current account deficit."

Actually, foreigners are mostly investing in U.S. mortgage-backed securities. Basically, the economy these days goes like this: American household refinances home, spends money at mall on Chinese goodies, Chinese factory sells dollars to People's Bank of China, People's Bank of China purchases American household's mortgage.

Of course, that's a gross exaggeration, but there's a kernel of truth there.

Posted by: Michael Robinson on July 29, 2003 07:48 AM

One more vote for Hal's point of view. Fixation on exporting jobs is the wrong emphasis. It is true that not only manufacturing jobs, but also fairly sophisticated and high-paying service sector jobs and high tech jobs are moving overseas (India and China). However, protectionism is not the answer. Trying to force companies not to export jobs when they can be done more cheaply and equally well elsewhere means that their profits will remain sluggish, and they will continue to drag thier heels in hiring workers here in the U.S.

The cost savings realized by exporting jobs can be used to improve profits and ultimately hire more U.S. workers. Also, the virtual absence of inflation, in part attributable to high-quality, low-cost imports from abroad, benefits every U.S. worker and lower-income people in particular. What if everyone had to shop at high-priced clothing boutiques and couldn't buy inexpensive clothes at Wal-Mart? Everyone would bitch about the cost of living. In the aggregate, and lacking distortion introduced by misguided government "job-saving" policies, international trade tends to be a net benefit to both nations which engage in it. American companies are increasingly selling products in China, which has the world's fastest-growing automobile secotr, fastest-growing consumer products sector, and so on. Johnson and Johnson, based in New Jersey, sells a heck of a lot of baby shampoo in China and has the same reputation for safety and quality there as it does in the U.S.

Evidence for the beneficial aspects of decreased government interference in the labor market can be seen in Germany. Modest reforms in their sclerotic labor market (i.e. the creation of mini-jobs and mini-businesses exempt from the onerous national labor laws) have created far more employment than initially estimated, almost immediately after their introduction (see this week's Economist).

Since making textiles and shoes in the U.S. doesn't make sense economically, ultimately setting up protectionist barriers doesn't work and wastes a lot of resources. In addition, because of a relatively open economy in the U.S., "foreign" companies like Toyota have built any number of plants in the U.S., a huge benefit to the job market here. If you lived in South Carolina or Kentucky, would you rather work in a textile plant or a coal mine for near-minimum wage or in a Toyota factory?

It would be better to fund educational opportunites for displaced workers or even grant them a lump sum of money than try to protect their jobs indefinitely. The buffeting economic high winds of globalization which virtually every developing country has long since been forced to live with are increasingly hitting advanced economies. Unless you want the U.S. to end up like Germany or Japan, you need to learn to survive in this wind, because it's not going to go away.

Posted by: Daniel Calto on July 29, 2003 07:48 AM

I mean a falling jobless rate. Productivity growth last year was 4%, but I cannot believe the trend is that high.

Posted by: Brad DeLong on July 29, 2003 08:04 AM

Increasingly, I prefer the Financial Times to the Economist. Far sharper analysis, less know-it-all British Raj forever ideological slant. Growth of 3.5% for the next year appears quite possible. At least the bond and stock markets are telling us so.

Posted by: anne on July 29, 2003 08:36 AM

But Brad...(imagine a childlike whine), how about the GDP forecast? If it all comes down to getting GDP growing well above 3.5%, what are the odds?

I have a suspicion about this week's GDP release. If the inventory component is a big drag (looks like it will be), that will be 2 quarters in a row of inventory decline. In a growing economy, that probably means a big lift from inventories in Q3. So there is the better showing from Q3 that everybody is talking about, but what does the economy do for an encore? An inventory rebound is easy. Getting final demand up is harder.

Posted by: K Harris on July 29, 2003 10:42 AM

"The buffeting economic high winds of globalization which virtually every developing country has long since been forced to live with are increasingly hitting advanced economies. Unless you want the U.S. to end up like Germany or Japan, you need to learn to survive in this wind, because it's not going to go away."


Well, yes, I WOULD like to see us end up like Germany and Japan. Germany and Japan MAKE STUFF that they EXPORT. We don't. We just borrow. Germany and Japan take care of their citizens with eahlth care, pensions, elder care. We don't. Only the rich matter here.

When the bill comes due for our borrowing Germany and Japan are going to be looking sweet.

Posted by: IssuesGuy on July 29, 2003 11:04 AM

Re Michael Robinson's comment, does trade theory allow for the situation where foreigners aren't actually investing in new, productive assets in the US, but rather just purchasing existing ones from US owners?

Broadly, "We'll trade you this [productive] factory in exchange for consumer goods."

Posted by: Stephen J Fromm on July 29, 2003 11:57 AM

Re Michael Robinson's comment, does trade theory allow for the situation where foreigners aren't actually investing in new, productive assets in the US, but rather just purchasing existing ones from US owners?

Broadly, "We'll trade you this [productive] factory in exchange for consumer goods."

Posted by: Stephen J Fromm on July 29, 2003 12:02 PM

Interestingly, Grover Norquist was on Dianne Rehm this morning. Grover was not worried about the unemployment rate. He went back to Jimmy Carter's misery index (unemployment + inflation) and argued that because inflation was so low, the unemployment would not matter so much. Grover also said that Republicans and Bush targeted the stock market to rise and with more Americans owning stocks or funds, that the good news in stocks would give Mr. Bush a boost in 2004. Grover also said that more old people were dependent on investments and would benefit from the rising stock market.

I think Norquist is wrong in so many ways. Unemployment does trump all other factors, regardless of misery index. High income elderly may have a lot of stock investments, but many elderly have money in CDs and GNMA's and other "safe" investments. These are not doing very well and are unlikely to improve going into 2004. I think it is important to listen to Norquist because he seems to be closely linked to Bush economic policy and where it is headed.

Posted by: bakho on July 29, 2003 02:28 PM

Brad and others,
Not entirely related, but here's an interview with George Akerlof in today's Der Spiegel, where he talks about the administration's fiscal policies.

http://www.spiegel.de/wirtschaft/0,1518,258983,00.html


Posted by: Reuben on July 29, 2003 03:11 PM

Daniel Calto writes: "The cost savings realized by exporting jobs can be used to improve profits and ultimately hire more U.S. workers."

Why hire US workers? Why not use the cost savings from exporting jobs to hire more cheap offshore workers?

Posted by: Jon H on July 29, 2003 04:02 PM

Yes, yes, free trade is always good. We know this is fundamanetal and not to be questioned.

Posted by: Ian Welsh on July 29, 2003 10:41 PM
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