The “Medical Examiner” gets the “Anatomy” Wrong

In his “Anatomy of Recession and Recovery”, Karl Smith “severs” the labor market “anatomy” in two:

Here I basically split the labor market into two parts: Goods and Government and everything else.

Showing a version of this chart:

And argues (my bolds):

Everything else hit a wall in 2008 but as you can see it was a nice natural V. It was not even the job-less U of 2000. And since the beginning of 2010 everything else has been growing just as fast as the last recovery. As we moved into 2012 job growth seems to be speeding up faster than anything we saw last time around.

The difference this time was goods and government. To cut it down to the micro-level I like we are largely talking about construction workers, metal and automotive workers, and school teachers.

These workers are massively influenced by credit constraints. One cannot build a building without credit. One cannot buy a vehicle without credit and state and local governments have very little credit room by statute.

So what we need for job growth to really hit its stride is for construction to comeback, cars to comeback and school teachers to come back.

Basically KS falls into the “growth trap”. This time around the BIG difference from the previous cycles is that the LEVEL of employment took a HUGE hit (when nominal spending “tanked”). So it´s not ENOUGH that “everything else” grows “just as fast” as in the last recovery. “Everything else” would have to grow much faster to reach “level ground”. For that to happen, spending (NGDP) would have to grow much faster.

And continues:

The process is well on its way with cars, though could be derailed. Construction is building and my best guess is that school teachers will start to be rehired in about 12 – 18 months.

Though again because these sectors respond so much to liquidity the job recovery is still fragile.

And will remain so unless spending rises faster.

See this related post: The “Hole theory of Employment”

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