The Jobless Recovery: A Cause for Concern, Not Alarm
Last week's employment figures must have caused consternation in the White House. They dampened spirits in my own house, too, as it happens, and made me want to return straightaway to the subject of my previous column. In that article ("George Bush and the Labor Market: Like Father, Like Son?" 2/28/04, p. 602), I acknowledged that the failure of this expansion to generate jobs posed a huge political risk for the president. But so far as the underlying economic prospects were concerned, I took a pretty optimistic line. How do I feel about that, I wondered, after last Friday's employment report?
A little chastened, I must admit. The numbers really were surprisingly bad. Although the employment figures do jump around a lot from month to month, and it is always a mistake to read too much into a single month's report, it nonetheless was striking that for the second month in the past three, net job creation was almost zero.
The American economy is still an awfully long way from replacing the jobs that were lost in the slowdown. And this is true even though the recovery, by most other measures, looks pretty robust. So the past few days have seen an understandable surge of comment arguing that the Bush administration is getting the economy all wrong—and that economists, who typically are not much concerned by a weak jobs market, are getting it all wrong as well, because the numbers suggest that something new and disturbing is going on.
Might this be correct? The February report showed that net payroll jobs increased by only 21,000 (and this was due not to accelerated hiring by private companies, but to a rise in state public-sector employment). Hours worked actually fell. Yet consumers are spending avidly. An index of retail sales calculated by Goldman Sachs now shows a mighty year-on-year rise of 7 percent. Figures collected by the Institute for Supply Management, which are followed carefully by the financial markets, point to continuing expansion of the economy in manufacturing and nonmanufacturing alike. So where are the jobs?
The unemployment rate did hold steady at 5.6 percent, very low by international standards—but again the administration's critics are partly right to find little comfort there. This number stayed put because participation in the labor force declined again. Unemployment is measured as the proportion of those wishing to work who lack a job. When people have been out of work for months and see no prospect of getting a job, they may stop trying and drop out of the unemployment figures as "discouraged workers." To the extent that this phenomenon is holding down the unemployment rate, that steady 5.6 percent is little to boast about. In any case, if new job creation remains as weak as it has for the past three months, measured unemployment is going to start rising again, and then the White House really will have something to worry about.
For President Bush, the political danger in all this is obvious. The White House cannot say it is unconcerned about jobs and expect to go unpunished. But that does not alter the fact that the mounting alarm over employment may indeed be overdone. Likewise, the administration cannot say that the weakness in the jobs market is not its fault, and expect voters to believe it. Again, however, it might be true.
Despite Friday's report, I still think that the concern about the underlying state of the economy is exaggerated. And I also think that blaming the administration for the jobs drought makes little sense.
The important thing to understand, as I argued last time, is that the slow growth in jobs is the counterpart of the continuing breakthrough in productivity growth. When you examine the pattern of job creation and destruction in this most recent economic cycle, what you find is unusual. It is not entirely new, in fact, because something similar (albeit milder) happened in the early 1990s. But it is quite unlike the pattern seen during previous postwar cycles.
Hitherto, most of the jobs lost during downswings had been "cyclical" rather than "structural." In other words, employers laid people off from positions that they did not intend to shut down permanently: As demand recovered, those positions were refilled, quite often with the same workers as before. In the past two cycles, and especially in the current one, "structural" job losses have played a much bigger role. Employers have laid people off in the expectation that those positions will never be filled again. Higher employment in the upswing requires not just a recovery of demand (which America is seeing just fine), but also the creation of entirely new jobs—which takes time.
Amid all the hand-wringing about this jobless recovery, one rarely hears it acknowledged that this structural change in the economy is, in itself, a good thing. The scare about jobs migrating overseas (vastly overdone, because the numbers are tiny) supports the idea that the American economy is somehow in retreat, that it faces a crisis of competitiveness, and that the structural forces keeping a lid on the creation of new employment are actually the forces of economic decline. Just the opposite is true.
What is keeping a lid on the net expansion of jobs right now is the rapid growth in productivity. The New Economy evangelists of the late 1990s got badly carried away, no question about it, but commentators such as myself who suspected that the whole productivity story was fiction turned out to be wrong. The signs are that the computer and communications technologies introduced during the 1980s and 1990s in America are generating a powerful and ongoing improvement in output per worker. This step-change to higher productivity growth is good news. This is how countries get richer. Indeed, over the medium and long term, it is the only way that countries get richer. The labor market's weakness is a real and pressing problem for millions of Americans, and is an almighty political headache for the White House—but if this is a tale of economic failure, then so was the introduction of electric power in the 19th century. Should Thomas Edison be remembered mainly as a destroyerÊof jobs?
Still, it is fair to ask whether the Bush administration has done as much as it could to cushion workers from the economy's growing pains. And the answer is, no. Although it has pushed through a colossal fiscal stimulus, the administration failed to design it for maximum job-creation impact. It would certainly have been possible to get more economic stimulus out of a smaller budget deficit, if the administration's fiscal program had relied less on tax cuts for the rich and more on tax cuts for the less well-off, together with spending aimed specifically at generating employment.
Could the economy actually stand any more stimulus? This question is beginning to be asked—unsurprisingly, since the vast budget deficit, the Federal Reserve's decision to keep interest rates as low as possible, and the falling dollar all add up to an extraordinarily loose stance of macroeconomic policy. Inflation is just now starting to resurface as a concern: Alan Greenspan, the Fed's governor, signaled as much last week, when he said that the Fed's current position on interest rates was "inconsistent with general long-term stability." And some economic analysts see the run-up in the prices of assets such as stocks and housing as a sign that things have already gone too far. Against this is the fact that productivity growth makes room for a bigger stimulus than would otherwise be safe. And the signs are that inflation is still some way off. All things considered, a more potent stimulus delivered earlier would have been good for jobs. On this, the administration is at fault.
What can be done right now? Big-fix measures inspired by a false sense of crisis might easily do more harm than good. I would put ideas like a 100 percent tax credit for employers' health care costs into this category. One dreads to think what such a credit would do to health-cost inflation. Anyway, it miscasts the present labor-market difficulties as a chronic problem of competitiveness, and accordingly spreads the stimulus right across the economy, rather than focusing on the margin of new-job creation, especially at the low-wage-end of the labor market. The proposal to extend unemployment assistance makes sense, though, given the upward drift in long-term unemployment and the need to keep labor-force participation up. And I would put more money into low-wage employment subsidies such as the Earned Income Tax Credit, and much more into schemes aimed at helping displaced workers retrain and relocate.
Whether any of this would help George Bush in November is doubtful, however. On the economy, what he needs is rapidly rising employment—and of that, for now, there is no sign.