Jobless recovery – a brief overview
This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.
The employment report of July, published on August 7, included several signs suggesting that the labor market is stabilizing. The next question is what comes after stabilization. Historically, payroll employment has posted gains within 12 months into a recovery/expansion and gathers significant momentum by the end of 24 months in all post-war business cycles with the exception of the 1991 and 2001 recoveries (see table 1). The January – July 1980 recession was a short recession followed by another recession in July 1981. The 1991 and 2001 recoveries have been coined as ‘jobless recoveries’ based on the nature of the growth of payroll employment and the changes in the jobless rate.
Table 1 Change in Payroll Employment from Trough of Business Cycle
The unemployment rate typically peaks after a recession; the computations in table 2 would be different in magnitude if the peak of the jobless rate were considered instead of the jobless rate that prevailed at the trough of the business cycle. However for purposes of comparison, table 2 is constructed around troughs of the business cycle. As shown in table 2, the unemployment rate declined at the end of twelve months in all post-war recoveries with the exception of the 1970, 1991, and 2001 recoveries. The 1991 and 2001 recoveries are marked with a prolonged increase of the unemployment rate even after 24 months of the official date of an economic recovery.
Table 2 Change in Unemployment rate from Trough of Business Cycle
There is a growing consensus that the recovery this time around is most likely to be a jobless recovery. Research from the Federal Reserve Bank of San Francisco (Jobless Recovery Redux?) confirms this view. One of the reasons for the pessimism cited in this research is that involuntary part-time employment is high which implies that employers can extend hours of these part-time employees when the recovery occurs instead of increasing payrolls.’
More importantly, the course of monetary policy in a jobless recovery will be a challenge given the Fed’s extraordinary easing in place. In the 1991 recovery, the Fed held the funds rate at 3.00% from September 1992 to February 1994. The unemployment rate had declined to 6.6% from a high of 7.8% when the Fed embarked on a tightening path. In the 2001 recovery phase, the Fed lowered the federal funds rate to 1.75% by December 2001 and eased further to 1.00% by June 2003. The federal funds rate held at 1.00% between June 2003 and June 2004. The Fed commenced tightening in June 2004 when the unemployment rate had dropped to 5.6% from a cycle high of 6.3%. This time around, the Fed may not be in a position to wait until the unemployment rate has dropped by a significant measure before it unwinds the programs put in place to stabilize the financial system. In addition, the Fed is sensitive to criticism pertaining to the delayed tightening in 2004. At the same time, the risk case now is that of tightening monetary policy later rather than sooner given the severity of the current crisis and its ramifications.
* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.
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