Jobs, where are you?

From the Fed Statement (April 27):

Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually.

From David Leonhardt in the NYT (May 6):

The job market continues to improve, which is certainly welcome news. But the pace of improvement remains modest. Unfortunately, that’s the typical pattern in the wake of a financial crisis.

From Paul Krugman (May 6):

It’s not as if our political class is feeling complacent. On the contrary, D.C. economic discourse is saturated with fear: fear of a debt crisis, of runaway inflation, of a disastrous plunge in the dollar. Scare stories are very much on politicians’ minds.

Yet none of these scare stories reflect anything that is actually happening, or is likely to happen. And while the threats are imaginary, fear of these imaginary threats has real consequences: an absence of any action to deal with the real crisis, the suffering now being experienced by millions of jobless Americans and their families.

The Krugman quote is a much better reflection of reality than utterances that “conditions in the labor market are improving gradually” or “the job market continues to improve”.

And the “unfortunately, that´s the typical pattern in the wake of a financial crisis” is the biggest cop-out, that plays right into the hands of the Fed, by “absolving” monetary policy from responsibility.

I make one basic assumption: The Fed has a good measure of control over nominal magnitudes.

The 3 pictures show nominal spending and it´s trend level and employment (Non Farm) over the three recessions that took place during the so called “Great Moderation”. In each picture the start date is the quarter the recession officially began. The dotted brown line indicates the quarter the recession officially ended while the green dotted line marks the maximum employment loss. (Note: The trend is the same over all periods)

In the 1990/91 recession – that contained elements of a financial crisis associated with the S&L debacle – the maximum loss in employment was 1.3 million (1.2% from peak). But we observe that nominal spending remained very close to trend, which resulted in a strong employment rebound.

Following the 2001 recession, nominal spending dropped significantly below trend. The loss in employment reached 2.7 million (2.1% from peak). But once spending growth increased enough to take spending back to trend employment growth turned strongly positive.

The present situation is “unique” in the sense that nominal spending – something over which the Fed has control – did not just “drop”. It “tanked”! No mystery why employment loss reached 8.6 million (6.2% from peak).

The “improvement” in the job market is peddled as “welcome news”. It´s not, only serving as a reminder how dire the labor market situation really is . And things in the labor market will remain bleak as long as nominal spending remains far below any reasonable trend level, running the risk of turning a “cyclical” event into a “structural” problem.

Update: After examining different organs (sectors) of the economy, Karl Smith concludes:

So given the real potential for a construction turn around and the likely healing of state and local government the jobs trajectory looks fairly good.

Question: Why doesn´t the “whole body” feel that?

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2 thoughts on “Jobs, where are you?

  1. Why did unemployment rise so much in 1991 and 2001 despite NGDP in both cases maintaining a stable growth trend?

    One can debate whether the fall of NGDP was “significant” in 2001, because it looks as though the actual was about $300 billion below trend at the -2.7 million trough. But I don’t think there is a debate about the NGDP during the 1991 fall in unemployment.

    How can you know that monetary policy had nothing to do with the cause of unemployment in 1991?

    • George, in 1991 the Fed was trying to bring the level of inflation down from a 4% average. It did so. It was called “opportunistic disinflation” by Orphanides.As Scott mentions in the comment section of his post, it´s quite likely the trend level of NGDP prevailing in the 1980s was higher than the trend that was established following the 1990/91 disinflation. That new trend remained in place all the way to 2007.
      The drop below trend in 2001-03 was very significant (giving rise to a lot of “deflation talk”). In the FOMC meeting of August 2003, “forward guidance” was applied for the first time. Bringing rates down to 1% had not changed anything, but forward guidance did the trick. Spending began to rise back towards trend and employment ‘took off’, with unemployment coming all the way down to 4%.

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