September 03, 2003

Erica Groshen and Simon Potter: Structural Change and the Jobless Recovery

UPDATE: Let us now curse and keelhaul the webmasters of the Federal Reserve Bank of San Francisco. They have broken their links. Erica and Simon's article is now here.


These aren't my thoughts--I have no informed contribution to make here--but they are very, very interesting ones. Erica Groshen and Simon Potter of the New York Fed are doing serious work on why the last two recessions have been followed by "jobless recoveries."

Has Structural Change Contributed to a Jobless Recovery? - Federal Reserve Bank of New York: The sluggishness of payroll growth during the 1991-92 and current recoveries stands in sharp contrast to the vigorous rebound in employment during earlier recoveries (Chart 1). To be sure, these earlier recoveries had rocky moments, with occasional jobless intervals. At the start of any recovery, many employers will delay hires or recalls for a time to be certain that the increase in demand will continue. Nevertheless, although the job market resurgence in the past may often have lagged the output recovery by one quarter, only during the two most recent recoveries has the divergence between job and output growth persisted for a longer period.

The divergent paths of output and employment in 1991-92 and 2002-03 suggest the emergence of a new kind of recovery, one driven mostly by productivity increases rather than payroll gains. The fact that no influx of new workers occurred in the two most recent recoveries means that output grew because workers were producing more. Although one might speculate that output increased because workers were putting in longer days, average hours worked by employees actually changed little during this and the previous jobless recovery.

The parallels between the two most recent recoveries raise hopes that the current recovery will ultimately follow the same course as its predecessor. After about eighteen months, the 1991-92 recovery ushered in very strong employment growth and the longest economic expansion of the postwar period. But while we cannot know when--or how vigorously--job growth will revive during this recovery, we can explore why the recovery is jobless now....

Recessions mix cyclical and structural adjustments. Cyclical adjustments are reversible responses to lulls in demand, while structural adjustments transform a firm or industry by relocating workers and capital. The job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid-off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes, however, are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job.

A preponderance of structural--as opposed to cyclical--adjustments during the most recent recession would help to explain why employment has languished during the re-covery. If job growth now depends on the creation of new positions in different firms and industries, then we would expect a long lag before employment rebounded. Employers incur risks in creating new jobs, and require additional time to establish and fill positions....


In the four recessions before 1990, unemployment from temporary layoffs rose throughout the downturn and fell sharply after the trough, adding substantially to the run-up and then the decline in total unemployment. In the 1990-91 and 2001 recessions, by contrast, temporary layoffs contributed little to the path of unemployment. These layoffs barely increased in the 1990-91 recession and figured even less importantly in the 2001 recession...

1980-1982

we track the direction of job flows during and after the recession. If an industry’s job losses (or gains) during the recession were quickly reversed once the economy began to recover, we classify the job adjustments as cyclical. If, instead, the outflow of jobs from (or the inflow of jobs to) the industry continued during the recovery, we conclude that the jobs have been permanently relocated and we classify the adjustments as structural. We can then aggregate the adjustments made by individual industries to establish whether structural or cyclical changes predominated. We apply our method first to the 1980 and 1981-82 downturns...

The Recent Situation

The difference from the pattern of the early 1980s is quite stark: now, the industries cluster heavily in the two structural quadrants. Most of the industries that lost jobs during the recession—for example, communications, electronic equipment, and securities and commodities brokers—are still losing jobs. Balancing the structural losses of these industries, however, are the structural gains of others. For example, nondepository financial institutions, an industry grouping that includes mortgage brokers, added jobs during both the recession and the recovery. The trend revealed in Chart 4 is one in which jobs are relocated from some industries to others, not reclaimed by the same industries that had lost them earlier. The chart provides persuasive evidence that structural change predominated in the most recent recession...

Posted by DeLong at September 3, 2003 07:10 AM | TrackBack

Comments

"The chart provides persuasive evidence that structural change predominated in the most recent recession..." and still predominates.

Posted by: Stan on September 3, 2003 07:58 AM

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Great article. I've been persuaded by the structural approach for a long time. It makes concepts like the "output gap" seem pretty dated.

It's worth remembering, too, that the last "jobless recovery" from the trough in 1990-91 paved the way for very rapid job creation during the rest of the decade. Out willingness to tolerate the short-term pain pays large dividends and separates us from Japan and much of Europe, where policy is inclined to lock resources in sectors that market forces would otherwise shrink.

Posted by: Jim Harris on September 3, 2003 09:57 AM

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"It's worth remembering, too, that the last "jobless recovery" from the trough in 1990-91 paved the way for very rapid job creation during the rest of the decade."

Phooey. What I remember is a combination of fine stimulative fiscal policy from President Clinton and Secretary Rubin, an acceleration of technology application in business, a lessening of the Federal deficit [thanks to Clinton and Rubin], and stimulative lowering of interest rates.

The "short term employment pain is fine for the sake of the long run" crowd has it wrong, as any of those suffering without jobs well know. I will take Japanese or European labor market protections, rather than make American workers suffer.

Posted by: anne on September 3, 2003 10:49 AM

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I think hypothesis number one has a lot to it: "the structural decline observed in many industries might be a reaction to a period of overexpansion"

Some of the unemployed securities and commodities brokers became mortgage brokers when the stock market bubble burst and when the real estate bubble bursts they can move on the next hot money sector. Is this what the US economy has come to? Chasing jobs created by hot money flowing from sector to sector.

Easy money Al can't keep this shell game going forever.

Posted by: Kosh on September 3, 2003 11:01 AM

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http://www.nytimes.com/2003/08/31/business/yourmoney/31VIEW.html

A Way to Break the Cycle of Servitude
By LOUIS UCHITELLE

ON this Labor Day weekend, let us remember low-wage workers. Twenty percent of the work force — 26 million people — earn $8.23 an hour or less. Most of them are not teenagers snagging pocket money, but adults supporting families. With so little income, too many Americans are pushed into poverty, and getting out of this trap is increasingly difficult.

As many studies have shown, rising income inequality has driven people apart. And low-wage workers, occupying the bottom rung in this ruptured society, have descended into what amounts to a servant class. It is not their work that makes them servants. We need factory assemblers, store clerks, child care workers and the telephone operators who field calls to "800" numbers, processing much of the nation's commerce.

What makes them servants is the miserable pay. Measuring status by wage, as many Americans do, no one — the employers of low-wage worker, the public or the low-wage workers themselves — seems to value this class of work. Promotion, or higher pay, would be a way out. Unfortunately, neither solution kicks in very often. More than in the past, low-wage workers are stuck in place....

Posted by: lise on September 3, 2003 11:45 AM

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Thanks, good post (love the diagrams), interesting comments. Increasing rate of structural change - why not, technology seems to be developing at an increasing rate. And ultimately the jobs that are left would be the ones where productivity cannot increase significantly - in sectors like child care and teaching.

And one would expect severe frictions active in preventing exhaust system changers to become diaper changers, just as you expect it in rail-road workers becoming stock brokers. A Europeisation of the US labour market? But what are we doing here then - planned *cuts* in the child care sector!

http://blogofpandora.blogspot.com/2003_09_01_blogofpandora_archive.html#106261477825849998

A propos lise's NYT article above: "As many studies have shown, rising income inequality has driven people apart.", I think it gives a hint to why many W.European countries try to afford inequality. It would cut already small societies and labour-markets - by driving people apart - below critical mass, where friction would kill them.

Posted by: Mats on September 3, 2003 12:15 PM

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What role does the birth of the internet play in the 90s recovery and economic expansion? The browser debuted in 1993. What role did the maturing of the online industry play in the recession of 2001? Does it take more workers to maintain the web than it took to build it?

What effect does energy price increase have on the recessions? It seems that several of the recession were accompanied by increases in energy costs. Was energy company price gouging of CA a component in launching the 2001 recession? Did energy price increases in CA affect manufacturing and influence manufacturers to leave CA for places where energy prices are lower and more reliable? Just asking.

Posted by: bakho on September 3, 2003 12:49 PM

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Jim Harris makes an excellent point concerning the
outmoded concept of an output gap. And that further ties in to the FT article on inflation targeting and mechanistic Taylor rules which use the output gap as an input. The macroeconomics of
the future is going to be built on sectoral real business cycle models like those of Long and Plosser and horvath.
Yet still Prof de Long teaches outmoded Keynesianism to his intermediate students! Those poor Berkeley kids!

Posted by: Paul Emberton on September 3, 2003 12:50 PM

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"Yet still Prof de Long teaches outmoded Keynesianism to his intermediate students! Those poor Berkeley kids!"

Those lucky Berkeley kids. Lucky me, learning lots and lots and lots about Keynes. Phooey on the sturcture folks who would inflict pain on all others to save the chosen. Let's have more of a job-loss recovery to grow like blazes in future. Middle class workers? Who needs em? After the re-structuring we'll figure out where they belong. Phooey on the no pain no gain folks. Ain't their pain.

I like middle class workers....

Posted by: anne on September 3, 2003 01:28 PM

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The problem with this is that the "structural readjustment" in this recovery is the implosion of a bubble that only formed due to cyclical overheating in the late 90s -- a huge excess of "animal spirits". So the job changes are "structural" in the sense that there is a permanent downward adjustment in certain sectors, but "cyclical" in the sense that it represents a rebound from an overheated economy.

Posted by: Marcus Stanley on September 3, 2003 01:33 PM

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The problem with this is that the "structural readjustment" in this recovery is the implosion of a bubble that only formed due to cyclical overheating in the late 90s -- a huge excess of "animal spirits". So the job changes are "structural" in the sense that there is a permanent downward adjustment in certain sectors, but "cyclical" in the sense that it represents a rebound from an overheated economy.

Posted by: Marcus Stanley on September 3, 2003 01:38 PM

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How do you tell the difference between that which results from an overextended cycle and that which results from structural change?

For example, the dollar stayed high long into the recession, causing permanent job losses as companies gave up on waiting for dollar wages to fall and moved jobs elsewhere. These might appear to be structural job losses, but more aggressive fed easing might have prevented it. Now that the currency is finally down some, it's not like these companies can just reverse their decisions. It's too late, the cycle lasted so long the structure changed with it.

Structural has also been a pretty popular word to describe what has been going on in Japan for a decade, and if they should have a cyclical recovery from this structural problem it should prove quite interesting. Well time is still needed to see what happens.

(Anne, I think this is what you were getting at in the other discussion, and I agree it will be quite an interesting lesson if Japan were to just have a quick recovery from these supposedly deep structural issues--the same issues that made them so great 15 years ago and all of a sudden stopped working)

Posted by: snsterling on September 3, 2003 01:54 PM

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Japan has been hoping for a quick recovery for the past decade. Is a decade quick?

Posted by: bakho on September 3, 2003 02:24 PM

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Anne, I have 1 word for you and Japan

"Schumpeter"

Posted by: alex on September 3, 2003 03:15 PM

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How do you tell the difference between a structural change and alternating hot money sectors that created artificially by government policy. First the stock market bubble, now the real estate bubble. Does the shift in jobs from stock brokers and commodity brokers to mortgage brokers represent a real structural change in the economy? Or just the ephemeral results of bad Fed policy.

Step right up. Guess what shell the pea will be under next. A loser everytime.

Posted by: Kosh on September 4, 2003 07:46 AM

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How do you tell the difference between a structural change and alternating hot money sectors that created artificially by government policy. First the stock market bubble, now the real estate bubble. Does the shift in jobs from stock brokers and commodity brokers to mortgage brokers represent a real structural change in the economy? Or just the ephemeral results of bad Fed policy.

Step right up. Guess what shell the pea will be under next. A loser everytime.

Posted by: Kosh on September 4, 2003 07:50 AM

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Like others who have responded to this post, I like the article. However, I like it as a strart, rather than a conclusion - I have a few quibbles. The "structural" rise in employment in the mortgage sector seems to me to be highly dependent on low interest rates - dependent on a cyclical factor. Tacking the analysis to a set of dates arbitrarily arrived at, when this cycle has been so different from others, seems problematic. The NBER does not take interest rates into account when dating recessions, but interest rates are pretty obviously cyclical - even though in this case, they have remained low and even fallen long past the declared end of the latest recession. If the authors had decided to base their analysis on the interest rate cycle, rather than anything else, the one "structural" gain in employment they identify would seem very "cyclical".

To some extent, of course, decline in rates is itself secular, but that secular decline has been underway for 2 decades. Teasing the secular and cyclical components apart will probably require waiting at least till the end of the latest economic upswing.

Posted by: K Harris on September 4, 2003 10:44 AM

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The first thing you have to do is throw the NBER definition of a recession out the door. You are compareing apples to oranges in the recession of the 90"s and the recession of 2000. 1990 was a laymans recession, 2000 was an economical CRASH. Some people realise that the recovery doesn't really begin until 5-7 years after a crash. (Depending on the definition of a recovery) So the recovery after 87 started around 92-94. The recovery of 2000 should start around 05-07. We still have the recession of 04 to experience. I cannot remember the years, assume 80's, for the first time in -a long time- white collar workers got layed off in large numbers (because the bosses finaly realised that they were un-productive, and also by mergers and acquasitions.) Merge two companies and lay off 40% of the office people. This would tend to force the managers to be more productive, cut cost and raise profits. If they were smart they would discover (on their own) the 12 principals of management as layed out by Edward Demmings. Thus the productiveity would go up by management technics and less non-productive white collar workers. Thus the hours worked and the overtime would not go up. -----The uninployment graph in your article, is it accurate in the years? Then again it would be if you take into account Mergers and acquasitions that tend to happen durring the "recession years". Please give me you thoughts on this article. Sincerely, Jim Coomes, Pattaya, Thailand. Crashes:1929, 1974, 1987, 2000. The rest were just recessions. Jim.

Posted by: Jim Coomes on September 4, 2003 05:32 PM

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Responce; A way to break the cycle of servitude. Dear Louis, The real solution to your comment/article, Is "DEFLATION" Research the great depression. Better yet read the book "Deflation" by A.Gary Shilling. I'm waiting for the book to arrive. I think that it will expand upon my own theory about deflation. Many of America's economical problems would be solved if Deflation would happen. It might ever force the government to "pay off" the National DEBT.

Posted by: Jim Coomes on September 4, 2003 05:48 PM

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Jim, why would structural adjustments make the output gap problem disappear? Even if structural adjustments predominate (which K Harris points out the report may overemphasize), a significant portion of the economy is experiencing large increses in productivity. Low employment could very well result in an output gap for the remainder of the economy. They do not appear to be mutually exclusive.

Posted by: Stan on September 9, 2003 12:40 PM

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Isn't tough competetion from imports and outsourcing a major reason why we are witnessing a structural reallocation in the US labor market? If this is true, can we be sure that job losses pave the way for the creation of new jobs in the future? As long as the USD remains overvalued, manufacturing industries will most likely struggle.

Posted by: Poul Bendix Kristensen on September 17, 2003 04:41 AM

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