Tuesday, June 9, 2009
A paper in the Economic Letter at the San Francisco Fed (FRBSF) got a lot of media attention, suggesting that the recovery in the labor market will be slow:
The share of workers who have been laid off temporarily, rather than permanently, is at very low levels, and the number of workers who are involuntarily employed part-time is at historical highs. Both of these factors are likely to slow the recovery of the outflow rate over the course of the next several years.But this is only half of the story; and I believe that these results are somewhat overstated. The other half of the story is on the establishment side of the report, which reports average workweek across industry.
At the Federal Reserve of Chicago (FRBC), Danial Aaronson argues that the labor fluctuations have been "normal" given the magnitude of the output gap (i.e., current rate of production is less than that with full utilization of resources) using previous recessions as a guide. He suggests that the average workweek, which is has declined precipitously to 33.1 hours per week, is holding up better than expected (given the output gap, of course). Finally, that firms are generally not hoarding labor; firms at the heart of the recession are firing at record levels.
Aaronson even suggests that anecdotal evidence points to the manufacturing sector as reducing hours in order to save jobs (i.e., hoarding labor). Specifically, they offer this:
Much of this reflects the nature of this recession, with the decline in residential housing happening early on, followed by the credit crisis and the fall in consumer demand. Labor market performance in other industries [outside of construction, financial services, and leisure and hospitality] has looked fairly typical for a recession of this size. That said, work force adjustment continues and is not fully reflected in the data through 2009:Q1. For instance, some more recent anecdotal evidence has noted further efforts to reduce hours in order to avoid additional layoffs in manufacturing.5What this means to me is this: that the reduction in labor hours - voluntary or involuntary - is warranted. And that perhaps the surge in involuntary part-time employment (which may be holding up better than one would think) is suggested by the massive output gap. Productivity (see below) remains positive, suggesting that firms are generally not hoarding labor. Therefore, the recovery implied by the FRBSF paper may be slightly overstated.
Annual productivity growth (chart to left) has remained remarkably positive throughout the Great Recession! (In six of the last ten recessions, productivity growth turned negative, and the rest except for the '01 and '90 recessions, neared zero.) Since productivity growth has remained very positive, 1.9% over the year in Q1 2009, firms are firing at record rates; and perhaps they are firing more "coincidently" than in previous recessions.
However, this is untrue in manufacturing, where productivity growth is the lowest since the series was first measured in 1987, -3.2%over the year. To me, this suggests that non-manufacturing industries will be forced to hire once positive demand is established.