A Grand Unified Theory of the Jobless Recovery

Something's not right.

In most recessions in the last 60 years, jobs recovered soon after the economy healed. But in the last three downturns -- the early 90s, the early 00s, and today -- companies continued to slash jobs and hold off hiring for months, even years, after profits returned. In the current recession, many commentators are perplexed that corporations are sitting on their largest cash pile ever rather than investing in new workers.

Who or what can we blame? Four things.

Start at the top with executive pay, says Robert J. Gordon, a Northwestern economist, in a new paper. The share of executive compensation taking the form of stock options increased by 55% in the 1990s. That made the big suits particularly sensitive to downturns in the stock market, which has collapsed twice in the last decade, after the tech and housing bubbles burst.

Executive pay depends on high stock prices. High stock prices depend on high quarterly profits. High quarterly profits in a downturn depend on lower costs, and the fastest route to lower costs is to slash workers while the economy suffers. That's why "industries experiencing the steepest declines in profits in 2000-02 had the largest declines in employment and largest increases in productivity," Gordon writes.

That's not all. While sacrificing workers for higher profit became de rigeur, a combination of factors also made mass layoffs attractive. Higher immigration and imports, the rising cost of medical care, and lower labor union penetration -- all of these factors encourage firms to reduce hours faster than we might expect.

Third, technology has made many middle tier while-collar jobs "vulnerable to replacement by computers or outsourcing. As Gordon writes: "Middle-level white collar employees have been turned into mere commodities by the ubiquity of substitution between people and computers."

Finally, there's the rise of reluctant part-time employment -- which BLS counts as broad unemployment. One way to think of this group is to imagine the economy as a fleet of pick-up trucks. In good times, the truck cabin is big enough to offer plenty of space to almost everybody who wants a seat. But in this downturn, the big employers swapped for cheaper trucks with a smaller cabin and bigger cargo space and stuffed part-timers, contractors, freelancers, and interns in the back. Employers realize that they can get away with more people without benefits in the bed and fewer people with cushy spots in the cab. The part-time economy is here to stay.

It's common for critics of the administration to blame the jobs crisis on Obama's health care plan, or to mock the White House for predicting the Recovery Act would keep unemployment below 8 percent, when instead it soared above 10 percent with the stimulus. For sure, the White House's economic policy has been stop-start and full of half measures. But studies like this are important reminders that the new millennium has created a new kind of economy and a new kind of recession. Jobless recoveries now appear to be the new normal. We need a menu of economic policies that recognize why, and try to combat the new reality.