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Money Talks

By Dr. Gregg Dimkoff
Professor, Grand Valley State University
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Here are two news headlines for you to ponder:

“Jobless Recovery: Is it Really Happening?”
“Jobs Remain Missing Link To Recovery”

Now look at these headlines:

“June Unemployment Figures Show U.S. ‘Recovery’ is ‘Jobless’”
“The Jobless Recovery”
“Jobless Recovery Dampening Consumer Confidence”
“The U.S. Economy, the Jobless Recovery, and the State of our Manufacturing Sector”

Can you guess the difference between the two groups of headlines? Let me ramp up the question’s difficulty. Here’s a third set:

“Here Comes the Jobless Recovery”
“America’s Jobless Recovery: Where are the Jobs?”
“About our Jobless Recovery”
“Robots are Creating Jobless Recovery”

Do you see a difference among these three sets of headlines? Probably not. Each set addresses the lack of new job creation following the end of the recession. The difference among the three sets has to do with which recession the authors were writing about. The first set is comprised of headlines written shortly after the 1991 recession ended, the second set followed the 2001 recession’s end, while the last set of headlines were written within the past two years.

If nothing else, the headlines should convince you that not much has changed over the past 20 years when it comes to how job creation behaves after the U.S. economy recovers from recessions.

The unemployment rate measures the effect of recessions. And without a doubt, job creation significantly lags the end of recessions. In fact, the unemployment rate is a lagging economic indicator, peaking at least several months — and often more than a year — after recessions end. It then slowly falls as the economy gains strength. It has behaved that way for many decades, and its current behavior during the recently ended recession is no different.

Several factors explain the lag. As the economy sinks, most employers are reluctant to lay off employees. Existing employees are trained, skilled and in many cases, part of the company family. Most employers wish to avoid layoffs, because laid off workers might not be around to rehire when business picks up. Many of those workers will find jobs working for competitors, will find work in different industries and will find jobs in different parts of the country. Once laid off, they won’t return. Likewise, many employers don’t get any pleasure from laying off workers who they view as members of their work families. Those employers lay off workers only as a last resort when it becomes clear their businesses won’t survive otherwise.

The way unemployment insurance is funded also helps explain why unemployment rates lag economic recoveries. Unemployment insurance is financed by state dictated unemployment payroll taxes. The more the layoffs, the higher the payroll tax rate. Thus, many employers wait as long as possible to avoid a hit to their payroll taxes, maybe even after the recession has ended, before their lack of sufficient sales forces layoffs.

Perhaps the most important factor explaining the lag is productivity growth. When recessions end and the economy begins growing, most employers are operating way below their capacity. They can ramp up production without hiring anyone. In general, the deeper the recession, the further below capacity businesses operate, and the more they can increase their output without hiring anyone. At the same time, some businesses are laying off workers, making the unemployment rate rise.

Finally, uncertainty about government policies and regulations can make employers hesitant to increase hiring even in a recovery. Many employers have been hesitant to hire because of uncertainty surrounding whether the Bush tax cuts would be extended (they were at the end of December), the outcome of last fall’s elections and the hope that gains by Republicans would temper the current Administration’s anti-business rhetoric (it seems to have), and uncertainty surrounding the higher costs of the new healthcare law (details have yet to be resolved).

For all of these reasons, many employers wait as long as they can before they are forced into a layoff to survive. Because most recessions are relatively short lived — the average recession over the past 65 years lasted about 12 months — many layoffs occur after recessions end and economic recovery is under way. The result is not only a peak unemployment rate during the recovery, but continued sluggish job growth well into the recovery.

That’s exactly what’s going on now. So a jobless recovery? Hardly. Rather, the recovery is just a normal recovery. Both the U.S. and Michigan economies are well into their recoveries, job growth is increasing and layoffs are decreasing. The unemployment rate is bound to fall.

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