National employment has increased by three million since January, and the change tells us a lot about how the labor market operates.
The headline from Friday’s employment report was that employment was lower in July than in the previous month and has hardly recovered since the beginning of the year. That headline report does not refer to actual estimates of employed persons, but rather to seasonally adjusted estimates.
The fact is that national employment was two million to three million higher in July than it was six months before (employment estimates vary somewhat between the business surveys and the household survey).
If previous seasonal patterns continue, much of that increase is expected to reverse itself by January. So, at first glance, there is no reason to get excited about the actual two million to three million increase.
But it’s big news that the seasonal employment cycle continues to operate as normal. The cycle is, of course, the outcome of seasonal fluctuations in supply and demand, and Keynesian economists insist that supply and demand are not operating normally since the recession began and that the economy has been caught in a “liquidity trap.”
Keynesian economists claim that labor supply — the willingness of people to work — doesn’t matter right now (or even that a more willing work force would reduce employment), which is why they advocate government stimuli that increase spending even while they erode work incentives. As Paul Krugman put it: “What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant.”
My view is that the stimulus law is partly responsible for today’s low employment, precisely because so many of its components have eroded work incentives. That’s why it’s so important to know whether supply operates as normal.
If the Keynesians are right, then the fact that teenagers become more willing and available to work when school lets out would not, during the recession, increase employment (and might even decrease it — Keynesians are not yet clear whether they think that the seasonal supply cycle would have a paradoxical effect, or merely no effect).
The chart below tests the Keynesian claims by comparing the seasonal employment cycle across years. Each series is the ratio of teenage employment to the employment of people ages 20 to 24. The teenage group is the most affected by the academic year, because they have so many more members in school. The 20-24 group is used as a benchmark to reflect the general changes in employment, and its possibly specific effects on the types of jobs that would disproportionately employ people under age 25.
The summers of 2009 and 2010 are the depth of this recession; the recession was still pretty mild in the summer of 2008. The years 2006 and 2007 are before the recession.
All five of the years show a teenage employment spike in July. In fact, the July 2009 and July 2010 spikes are about the same size — 15 to 17 percent (relative to the previous May) — as the 18 percent average of the previous three years.
People can argue about whether supply effects are marginally smaller during a recession. But the seasonal cycle clearly shows that labor supply remains important and cannot be approximated as a nonfactor, or even a sharply diminished factor, in today’s employment fluctuations.
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