According to Economic Cycle Research Institute President Bush is going to have some problems with jobs growth in the coming months. The problem is, in my opinion, three fold. First, the economy is going to have mediocre growth at best for the next several months and the second is that there appears to be a structural change in employment going on. Third the surge in productivity.
The first problem and its implications for employment should be fairly obvious. The economy is growing but at a less than normal pace. The primary reason appears to be, at least in part, higher oil prices. Higher fuel prices impact just about every facet of the economy. Consumers seeing higher prices at the pumps tend to cut back on other spending (the income effect of a price increase) and tend to do other things than drive places and spend money at those other places (the substitution effect). Thus, a decrease in consumer expenditures. Firms that rely on trucking to get their goods from the manufacturer to the retailer see an increase in prices and react accordingly there as well.
The second problem is not quite so obvious when looking at the gross statistics. The bottom line is that there have been far more structural changes to employment with this last recession than previous recession. A layoff is due to cyclical fluctuation and the employer will bring back the employee as soon as the cycle changes. A structural change is when a worker is not simply laid off, but that the job is completely eliminated and the worker has to move to another part of the economy. With the last recession Groshen and Potter find that 79% of the job losses with the last recession are structural whereas with previous recessions it was about 50%. Also consider, that in the early 1990’s (right in line with the recession under Bush I) the percentage of structural job loss was 57% and at that time there was a longer time from when the recession ended to when job growth started to gain strength.
Like the increase in energy prices, the surge in productivity is pretty obvious as to its impact on employment. It means that with the same number of workers more can be produced. Now long term this might not mean depressed levels of employment since higher profit levels will induce other firms to enter a market and drive down prices. Still, it can have a short term impact.
I am less persuaded by ECRI’s view that jobs overseas is playing a significant role. While there are jobs being offshored, it is not clear that the net loss is large enough to contribute significantly to the stagnation we have seen in the labor markets.
So while the jobs numbers from last week were good, it is unlikely to mean that the prospects for job growth for the next several months are good. Further, these are things that the President…any President can’t do much about. So when some pundits go bonkers on the jobs numbers try to keep some of this in mind. What this is suggesting is that the economy has changed from 1999 and expecting the same employment levels that were seen in 1999 is just…well bonkers.
