Wednesday, December 30, 2009

Not Your Father's Recession

Copyright, The New York Times Company
Our recession predictably continues to be one in which real gross domestic product and spending outperform the labor market. This pattern differs from the 1980-82 recession and suggests that public policy could be doing a better job this time of raising employment.

At this time a year ago, with the three quarters of G.D.P. data that was available, I explained how this recession had followed a pattern described decades ago by Paul Douglas, the senator and economics professor.

Professor Douglas said that a labor crisis would hurt spending but only in a ratio of 7 to 10. That is, for every 10 percentage points that employment and hours worked fell, total output and spending would fall 7 percentage points. Equivalently, one side effect of a labor crisis would be to raise employee productivity and real hourly wages, because productivity is the ratio of output to labor.

Since then, four more quarters of data have become available to further test this theory. From the fourth quarter of 2007 to the third quarter of 2009 (the most recent quarter with data available, and some say the trough of the recession), employment and hours worked fell 8.6 percent, while real spending and output declined 5.8 percent (both relative to trends).

The declines are almost exactly in the proportions predicted by Professor Douglas decades ago (an earlier discussion of this approach can be found here.)

By definition, the fact that real G.D.P. performed better than labor means that productivity rose. As a result, we expect hourly labor costs (that is, the amount employers spend on payroll and benefits for each hour that employees work) to have risen too.

The chart below displays private sector productivity and real wage series for this recession. Both rose a couple of percentage points, especially over the last year.



Many readers of last year’s article thought that it was only obvious that real G.D.P. should fall less than employment — employers, they said, would force more work upon the workers who kept their jobs. Employers may in fact be acting this way (although why are they paying more per hour?), but this pattern is not found in all recessions. During the 1980-82 recession, which has often been compared to this one, real G.D.P. and spending fell significantly more than employment and hours.

Many economists would agree that the causes of the current recession are different than in 1980-82, and that some of the differences can be seen in the productivity data. Some would say that high real wages are part of the problem — that employers would be hiring more if labor were cheaper. If that’s right, public policy so far in this recession seems to have gone in exactly the wrong direction by raising the minimum wage and otherwise increasing employment costs.

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