The big news today was that finally, after more than six years, the level of employment had regained its previous peak. There were the inevitable comparisons with the 1981-82 recession, which was deep but employment took less than one year to regain its previous peak.
There were also musings about the fact that over the last three cycles (1990/91, 2001 and 2007-09) something has changed (likely structurally) since employment has taken longer and longer to recover.
And lastly, there were manifested worries about the quality of the jobs being gained.
I will concentrate on just one thing: the role of monetary policy, measured by its effectiveness in keeping nominal aggregate demand (NGDP) close to trend, in the “production” of employment over the last three cycles.
The charts illustrate what I want to convey. The first set of charts covers the 1990-91 and 2001 cycles. Employment is measured from the peak to 77 months on, so the period covered is the same from the peak of the present cycle to May/14.
Takeaways: The deeper the fall in NGDP below trend, the bigger the drop in employment. The longer NGDP remains below trend, the longer employment takes to regain its previous peak. Importantly, it appears that the deeper the fall in NGDP, the more timid the employment growth when NGDP goes back to trend. Maybe that follows from the higher and more persistent level of long term unemployment and the loss of skills that accompany it.
It also appears that employment reaches its previous peak when the NGDP gap closes to -1% or less.
The next chart shows how this recession was “off the charts”.
Now, if it is approximately true that employment reaches its previous peak when the gap closes to something close to -1%, this would mean that the true gap is much, much smaller than could be imagined. The dashed line indicates how the “true” gap has evolved. The “nefarious” implication is that millions of job posts have disappeared because the trend level of nominal aggregate spending has been significantly lowered.
And, due to the deep fall in NGDP, the gains in employment even after the “new gap” is closed will continue to be very slow. As NGDP growth is also very low, the risk of inflation going up in any significant way is also extremely low.
It´s as if something like this has taken place:
Bottom Line: Monetary policy has managed to “throw the baby out with the bathwater”.
Update: “Jobs Report Will Intensify Fed Debate on Rate-Hike Timing” or “More babies will be thrown out”
Friday’s U.S. employment report painted an encouraging picture of the labor market and should reassure Federal Reserve officials that the economy is improving as they have been predicting. It will intensify their debate about when to start raising short-term interest rates, strengthening the hand of those officials who want to move sooner, but the question is far from resolved.
Update (June 12): From the WSJ:
Aftershocks from the deepest recession in generations continue to inflict lasting damage to the world economy’s potential, curbing employment prospects for millions, a new paper finds.
Laurence Ball, a John Hopkins University professor and former Federal Reservevisiting scholar, suggests some of the scars from the Great Recession may be more permanent, or at least less easily reversed, than previously thought.
Update (June 21) Phillipe Weil asks:
Has the Great Recession harmed the long-term growth prospects of the Eurozone economy?
The CEPR Business Cycle Dating Committee recently concluded that there is not yet enough evidence to call a business cycle trough in the Eurozone. Instead, the committee has announced a ‘prolonged pause’ in the recession. This Vox Talk discusses the possible directions that this situation could lead to and questions whether the Great Recession has harmed the Eurozone’s long-term growth prospects to the extent that meagre growth could become the ‘new normal’.
That´s a “no brainer”!
Historinhas 
Excellent blogging—and yet another maxim of macroeconomics becomes questionable: “In the long run, money is neutral.”
Well, perhaps if you live a few hundred years.
Many people, say those who were young in 1992 in Japan, or who had small businesses in the USA in 2008, have endured losses or setbacks that may be impossible to ever recover. Indeed, the whole economies of the USA and Japan would need years and years of robust growth to “get back” the output that has been lost forever.
In the real world, money is not neutral. In the real world, a too-tight monetary policy can crippled the economy and savage careers and businesses.
Maybe that is a “la-de-dah” to central bankers, peering through their microscopes at inflation.
If money is neutral in the long run, and central banksers are talking about in the long run they can’t do anything about employment. But “in the long run we are all dead.” So what is the purpose of central bankers? It is nonsensical to think that they have any sort of long run purpose; and I highly doubt their purpose in the short and medium runs is to make us all miserable which they have been highly successful in doing.