Yesterday on PBS I heard experts speculating about why recent recoveries have seen disappointing job growth. So I decided to take a look at the figures, and found that the entire concept of “jobless recoveries” is largely a myth. I say largely, as a examination of Okun’s Law may be able to find a tiny morsel of truth in the idea, but I found no evidence of any significant mysteries. Indeed no evidence of any jobless recoveries, mysterious or not.
Here are the data on the first 6 quarters of recovery from the last 4 recessions:
Period NGDP growth rate RGDP growth rate Change in jobless rate
1982:4 – 84:2 11.0% 7.7% – 3.4% (points)
1991:2 – 92:4 5.9% 3.1% +0.8%
2001:3 – 03:1 3.8% 1.8% +1.0%
2009:2 – 10:4 3.9% 2.8% -0.1%
The change in the unemployment rate was for the first 18 months after the cyclical trough. In the Reagan recovery, RGDP soared and unemployment fell sharply. In 2002 RGDP growth was well below trend, and unemployment rose. In 2009-10 RGDP grew at trend, and unemployment was stable. No surprises there. Only 1991-92 presents a bit of a puzzle, as RGDP grew at about trend, and unemployment rose 0.8%. But that’s it. Where’s the evidence of a recent trend toward jobless recoveries? What I see isn’t jobless recoveries, but three consecutive recessions where the first 6 quarters saw no recovery at all (relative to trend.) We fell into three deep holes, and started digging sideways.
So yes, the last three recessions have been quite different, but the difference was that during the first 6 quarters of “recovery” there was no recovery at all. And 1983 is not an outlier. We can’t do 1980, because the entire recovery lasted much less than 6 quarters, but previous postwar recessions saw RGDP rise at 5% to 10% rates during the first 6 quarters of recovery.
The real question is why did RGDP rise so slowly during the three most recent recoveries. If you haven’t guessed yet, you’re obviously new to my blog.
There’s no jobless recovery, there’s a jobless lack of recovery, or more accurately a M*V-less lack of recovery.
I don’t want to suggest that this is always a bad thing. The previous two recessions were embedded within the Great Moderation. Perhaps by being relatively stingy during the recovery period the Fed allowed for expansions of greater duration. But in this severe recession there is no excuse for such a stingy monetary policy. A 3.9% NGDP growth rate isn’t even digging sideways; it’s digging sideways and slightly deeper. If it weren’t for a certain degree of wage flexibility, 3.9% NGDP growth would have led to even higher unemployment, as real growth would have been well below trend. Instead, wage growth has slowed just enough to allow this sub-par NGDP growth to produce roughly average RGDP growth. In real terms we are digging sideways.
Of course the recent data are more upbeat, and if Fed forecasts are right we’ll finally get a recovery in 2011. Not clear why they couldn’t have provided a bit more NGDP growth in 2010.
Paul Krugman has noted the anomalous recoveries from recent recessions, and discussed structural issues having to do with balance sheets, bubbles bursting, etc. At some level he may be right, but I think it’s more useful to figure out why those factors led to slow NGDP growth. Did they disrupt the usual relationship between changes in the fed funds target, and changes in NGDP? I’d guess the answer is yes. Perhaps inflation targeting (rather than level targeting) also plays a role. Price level targeting leads to V-shaped recoveries and inflation targeting leads to L-shaped “recoveries.”