The Job-Rich Depression
BRITAIN’S economy has had an odd five years. In output terms, things have been terrible. The slump that started in 2008 is far worse than the 1930s depression; only the years after the first world war were harsher. Consumption has been dragged down by weak real wage growth, investment has been held back by tight credit and exporters have struggled with weak demand in the euro zone. The initial estimate of GDP growth in the fourth quarter of 2012, due shortly after The Economist went to press, was expected to contain more bad news.
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Yet the job market is humming. Data released on January 23rd show that employment has topped previous peaks (see first chart). The combination of economic slowdown and plentiful jobs means output per worker has fallen 12% further than at the same stage in previous recessions. That is equivalent to the loss of the entire manufacturing sector. Britain is now startlingly unproductive compared with other rich countries. What is going on?
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Some point to Britain’s growing army of part-timers, who account for a third of the 1.3m net new private-sector jobs created since 2010. Interns and other unpaid workers are classified as employed but may produce little output while learning their trades.
Still, neither answer solves the puzzle. Average hours worked have increased even as part-time jobs have become more common. And the 275,000 or so unpaid workers are a tiny fraction of Britain’s 30m- strong workforce. Britons really are producing less per hour worked. It is not the data that are odd. It is the British economy.
What can we make of this? Keynesians feel the problem is too little aggregate demand, and point to the very low RGDP growth rates. But RGDP is not the right way to measure AD, so this creates some problems for the Keynesian model. Old Keynesians tended to focus on the unemployment rate, but the British labor market is no worse than most other developed countries (US employment is far from the peak.) So where is the evidence that austerity is a problem?
New Keynesians use inflation as their AD indicator, but that’s run way over target for the past 5 years. So by that measure there is no AD problem at all.
I think the Keynesians are partly right, the UK does have an AD problem. I say ‘partly right’ because I suspect they also have big AS problems, which the Keynesians tend to underestimate. But I’d like to focus on where I agree—they have an AD problem.
Now I’d like to suggest an AD indicator that is far superior to either jobs or RGDP—you guessed it, NGDP. The growth rate of British NGDP has recently been quite low, and that’s keeping the unemployment rate above the natural rate.
So I’d encourage Keynesians to focus on NGDP as a policy indicator. It’s the variable that will best describe the AD problems they worry about. If you focus on RGDP, that raises the question of why so many extra workers haven’t created any extra output. New Classical skeptics will say there must be a productivity problem, and the Keynesians won’t have a good answer. After all, in the Keynesian model more AD leads to more NGDP—how that gets partitioned between RGDP and P depends on the slope of the SRAS curve, which demand-side policymakers cannot control.
In contrast, the NGDP “musical chairs” approach says that a sharp slowdown in NGDP growth will almost always cause excess unemployment, regardless of the supply-side of the economy.
PS. I won’t have time to answer comments over the next few days.