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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (44626)	9/18/2003 3:54:53 AM
From: IQBAL LATIF	Respond to of 50167

The Erosion of Okun's Law-Posted by DeLong We used to have considerable confidence in Okun's law: that an extra one percentage point rise (or fall) in the unemployment rate over a year would reduce (or boost) that real GDP growth by an extra 2.5 percent over that year because a rising (or falling) unemployment rate would also be accompanied by a falling (rising) share of the population in the labor force and by falling (rapidly rising) productivity. Productivity would fall when the unemployment rate rose for two reasons: first, even when factories are not running at full capacity they still incur substantial setup and maintenance costs; second, even when there isn't enough work for them to do firms would rather hold onto skilled workers than watch them drift away and have to pay to train their replacements the next time the wheel of the business cycle turns. Things have been different, however, in this recession (and to a lesser extent in the preceding early-1990s recession. The standard relationship between output growth and hours worked has gone substantially awry. See that branch poking out of the scatter diagram on the left side? That's the most recent data. (The smaller twig pointing out below and to the left of the branch is from the early-1990s recession and recovery.) The fact that falling hours have been accompanied by rapidly-rising productivity is what has given us not a jobless recovery but a massive job-loss recovery. The normal pattern we would expect from the past two years' output growth would be that employment and hours would have been nearly flat. Why the different pattern this time? We think that it is because firms are no longer "hoarding labor" when times are slack because the industries losing jobs no longer expect employment to bounce back. This means that we no longer have any confidence that we understand the cyclical pattern of productivity growth--which means that we have little ability to translate the (high) productivity growth numbers we see into information about what the underlying long-run trend growth rate of the economy is. Why is this? Why have firms changed their behavior? Let me turn the mike over to Erica Groshen and Simon Potter of the New York Federal Reserve Bank: Erica Groshen and Simon Potter (2003), "Has Structural Change Contributed to a Jobless Recovery?" (New York: 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...