- The Washington Times - Wednesday, September 10, 2003

For the past year and a half, commentators and self-styled economists have been relentlessly declaring that employment is a “lagging economic indicator,” which has always been “the last economic variable” to turn upward in an economic recovery.

The major problem with this statement is that it is simply wrong. The Conference Board, which compiles economic indicators tracking the business cycle, considers payroll employment to be a “coincident indicator,” which means that it closely tracks the business cycle. The National Bureau of Economic Research, which is the official arbiter of the business cycle, has long considered a surge in payroll employment as proof that a recession had ended. Indeed, a close review of the five U.S. recessions from 1960 through 1982 confirms that employment began to increase within a month or two of the business cycle’s trough. It was not until the aftermath of the 1990-91 recession that employment failed to increase quickly, a dilemma that gave rise to the term “jobless recovery.” (In fact, it was in May 1992, 15 months after the end of the recession, when employment finally exceeded its level at the cycle’s March 1991 trough.)

As this page has repeatedly documented, the employment situation following the end of the 2001 recession has been unprecedented in its failure to recover, even compared to what followed the 1990-91 downturn. The implication has been that the U.S. labor market may be experiencing strong, negative forces that it has never encountered before.

A recent study by the Federal Reserve Bank of New York argues that major structural adjustments — unprecedented in degree — explain why the economy continued to shed more than 1.7 million jobs during the seven quarters of economic growth that followed economic contraction during the first three quarters of 2001. “The sluggishness of payroll growth during the 1991-92 and current recoveries stands in sharp contrast to the vigorous rebound in employment during earlier recoveries,” the study observes. The recent divergent paths between output and employment “suggest the emergence of a new kind of recovery, one driven [more] by productivity increases than payroll gains.”

Recessions mix cyclical adjustments (whose job losses are reversible when demand increases) and structural adjustments (which generate permanent job losses). In the recessions during the 1970s and 1980s, there was an even mix between cyclical and structural adjustments. In the 2001 downturn, however, “79 percent of employees worked in industries affected more by structural shifts than by cyclical shifts,” the study found. Whereas temporary layoffs drove movement in the unemployment rate during the recessions of the 1970s and 1980s, permanent job losses predominated over temporary layoffs during the 2001 recession.

The upshot is that compared to previous downturns, a disproportionate number of the jobs lost during the latest recession and its aftermath will not be coming back.



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