The “jobs mystery”

It´s been getting reviews of late. I give just two examples. This from Ezra Klein:

Something odd is happening in the economy. Jobs are coming back, and relatively quickly. But growth is lagging. Or, at the least, we think it is. Virtually every estimate of GDP growth for the first quarter of 2012 is below two percent — that’s a third lower than it was in the fourth quarter of 2011, when payroll growth was lower — and many of those estimates are being revised downward as new data streams in.

That’s not normal, to say the least. Typically, payrolls and the economy grow in tandem. When that doesn’t happen, it’s usually because the economy is growing and jobs are stuck. That’s the situation the term “jobless recovery,” which came into vogue after the 2001 recession, describes. But we don’t even have a term for the opposite of a jobless recovery. Job-full recovery, maybe? A Jobcovery?

And this from Matt Yglesias:

The hot new topic to address this week is that in the early months of 2012 we appear to be witnessing the reverse of a “jobless recovery,” an economic growth cycle in which the increase in gross domestic product is not large enough to justify the quantity of net job creation.

I´ll tackle the “mystery” in terms of unemployment (instead of employment) so as to apply Okun´s “law” (an empirical relation between real GDP growth and the change in unemployment).

I estimated the relation on yearly data from the post (Korean) war period (57 years). The chart illustrating Okun´s “Law” follows.

First thing to note is the “stability” of this “Law”. The following chart illustrates one of several stability tests that can be applied (it passed all of them with “flying colors”). This test sequentially estimates the relation adding one data point at a time and checks if the estimation error keeps within bounds.

Like in the first chart, two points are noteworthy: 1974 and 2011. In 1974 there was the first oil shock. What happened in 2011 to “throw” the relation so far away from “normal”?

Note that during the so called “jobless recovery” in 2002-03 there´s nothing “special”. The same can be said for the year 2010. 1984 and 2009 are the two extremes. In 1984 NGDP grew “robustly” (“pushing” RGDP) and in 2009 it fell “deeply” (“pulling” RGDP). Both points are right on the regression line.

Ezra Klein tries to make sense of it:

A couple of things could be going on here. One possibility is that the preliminary GDP data is wrong. That happens. In the fourth quarter of 2008, the early GDP data said the economy shrunk by 3.8 percent. Later on, we learned the real number was closer to nine percent. A smaller, more positive discrepancy might explain this riddle, too.

Another is that the confidence fairy has come for a visit. Businesses are very, very lean right now. Perhaps a little too lean. One possibility is that many employers have come to the conclusion that their payrolls are lower than even the weak economy justifies, and the employment bounceback is a function of them hiring to reach a level they should already be at. Another is that businesses are increasingly confident that a recovery is coming, and they’re hiring in expectation of it.

And then there’s the possibility that the previous three months of job growth turn out to be a tease, and the recovery will falter in the middle of the year. Call that the “2011 scenario”: Back in February, March and April of 2011, payrolls rose by an average of 239,000 jobs a month. In May, June and July, that fell to an average of 78,000 a month. So far, this economy has not been kind to those who try and extrapolate a self-sustaining recovery from a few months of strong job growth.

Any of them could be “true”. Maybe also the “deepness” of the NGDP drop could have “messed” with the stability of the relation. Since we can´t pinpoint the reason we´ll have to wait. But maybe this sort of statement could be helping “screw” things. From today´s FOMC statement:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

In English: We expect the economy will remain weak going forward and so that everyone is on the same page we will keep the FF rate at exceptionally low levels for a long time. Or, even more “transparently”: Don´t expect us to act to change that expectation!

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