Wednesday, July 7, 2010

Don't Expect a Full Labor Market Recovery

Copyright, The New York Times Company

Labor market statistics for June 2010 were widely received with disappointment. But it is no surprise that some workers whose jobs ended in this recession will never work again.

It has always been clear that there would eventually be some kind of recovery from the 2008-9 recession. After all, falling housing prices and underwater mortgages were not going to last forever. Our population continues to grow, and eventually that population will demand more space in which to live. And worker productivity remains strong.

Consumers apparently agreed with this assessment, because they reduced their spending from previous trends much less than employers cut jobs.

The chart below shows seasonally adjusted indexes of consumer spending (adjusted for inflation and productivity growth before the recession) and hours worked (adjusted for population growth). For example, a value of 96 for consumer spending means that inflation-adjusted consumer spending was 4 percent below its trend before the recession, and a value of 90 for aggregate hours means that hours worked per American were 10 percent below what they were when the recession began.

Consumers reduced their spending a lot by historical standards – it’s only once in a generation that consumer spending falls 4 percent below trend as it did by the end of 2008 – but by late 2009 their spending had been cut only half as much as their hours worked had. Either consumers have been expecting that employment will at least partly rebound, or they plan yet further large spending cuts.

Thus, one piece of good news over the last nine months is that the latter has not yet transpired: the average consumer has not cut spending further, but rather since September 2009 has increased spending at a rate somewhat faster than before the recession (the trend-adjusted consumer-spending index went to 96.8 from 95.9; the spike in August was related to cash for clunkers).

The other news is that hours worked have increased somewhat faster than the population over the past nine months, which is consistent with the view that the labor market would at least partly recover, and not get worse than it was in 2009.

On the other hand, no one should have anticipated a rapid and full recovery for hours worked. For example, it will not be too long until large numbers of baby boomers are retired, rather than working as most of them are now.

For better or for worse, many in our country want a more extensive safety net and more government regulation of business activities, as Western Europeans already have. Economists may argue about the short-run effects of a generous safety net, and whether it is desirable in the long run, but they agree that one way or another a generous safety net eventually reduces hours worked per person.

Even without expanding social programs, it seems that the Bush tax cuts may expire, and the federal government may otherwise raise taxes. With higher tax rates in the future, we have to expect hours worked per American to remain below what it was before the recession.

Consumer behavior also seems to agree that the labor market will not fully recover. By my calculations, consumers could have cut their spending half as much as they actually did if they had expected the labor market to get back to prerecession levels by 2012. But in fact we saw the biggest consumer spending cut in a generation.

So if you expect all of the people who lost jobs in this recession to someday be working again, there will be many disappointing employment reports ahead. But you can expect the job market to grow at least as fast as our population over the next couple of years.

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