Job Growth Still Weak, Like the Recovery

Last week brought more mediocre news about the Nation's economy. According to the Bureau of Labor Statistics ("BLS"), the economy added a seasonally-adjusted 223,000 jobs in June, 2015, the 73rd month of this economic recovery.  (The current recovery started in June, 2009.)   The BLS also revised downward the employment growth figures for April and March.   These results follow prior reports that the economy grew a mere 0.2 percent in the first quarter of 2015, "nearly grinding to a halt," as a report in the Washington Post put it.

The New York Times, for instance, claims these latest employment figures show "healthy" job growth, consistent with its prior claim that May job growth (now revised downward) was "strong." (To be fair, another Times analyst opines that the June numbers are "weaker than they look.")  Analysis of the historical record, particularly that of the nation's recovery from the 1981-82 recession, suggests that June job growth, like that throughout this recovery, was quite disappointing.

As noted above, June, 2015 is the 73rd month of the recovery that began in June, 2009.  By comparison, the so-called Reagan recovery began in November, 1982.  The 73rd month of that recovery, November, 1988, saw job growth of 339,000, about 52 percent larger than that of June 2015.  (Go to this website and insert the appropriate dates to generate these figures.)    Moreover, this 52 percent figure actually understates the gap between job growth in these two months. After all, the workforce and thus total employment was significantly smaller (106,277,000) in October, 1988 than it was this most recent May (141,619,000).   Hence, employment grew at a rate of just over three tenths of one percent in November 1988 compared to the prior month's level, slightly more than double the June 2015 rate of growth. The significant disparity between these two months is not an anomaly: total employment increased by nearly nine tenths of one percent in the combined months of September, October and November of 1988, compared to less than five tenths of one percent in April, May and June 2015.     Previous posts on this blog have reached similar conclusions about the relative strength of employment growth during the Reagan recovery and the Obama recovery.  (See here and here, for instance.).  The left-leaning Center for American Progress apparently agrees.  In a recent essay about the state of the employment market, the CAP concludes that: "job growth remains weak compared to previous recessions."  (By "previous recessions" the essay apparently means "recoveries from previous recessions."). 

Such disappointing employment growth should not be surprising, given the slow pace of economic growth during this recovery which, as noted above, began in June, 2009.  Here are the annual rates of GDP growth for the last five years, according to the World Bank, beginning with 2010, the first full year of recovery from this most recent recession:


2010:   2.5

2011:   1.6

2012:   2.3

2013:   2.2

2014:   2.4

Thus, annual GDP growth averaged 2.2 percent during this period.

Here, by contrast, are the annual rates of GDP growth during the Reagan recovery, beginning with 1983, the first full year of recovery from this recession:

1983:  4.6

1984:  7.3

1985:  4.2

1986:  3.5

1987:  3.5

1988:  4.2

Annual GDP growth averaged 4.6 percent during this period, more than twice that during the Obama recovery.  (Note that excluding the 1983 figure results in the same rate of average annual GDP growth, namely, 4.6 percent). 

Economists and others will no doubt spend decades debating why the Obama recovery is so weak.  However, there can be no doubt that, judged by the rate of economic expansion and employment growth, this recovery is a disappointment that still leaves millions of Americans without the economic opportunities they deserve.   

Reflections on 2014 Employment Growth: Neither Boom Nor Bust

The Obama Administration and its allies are pointing to employment growth in 2014, during which the economy added about 2.95 million jobs, as evidence in support of the President's economic policies.  The President even bragged in his State of the Union Address that: "the economy is growing and creating jobs at the fastest pace since 1999."  More recently, media outlets characterized January job growth of 257,000 as "strong,"  (see here and here, for instance), and February job growth as evincing a "labor market boom."  (see here).

It is certainly true that job growth in 2014 was an improvement over the very slow growth or negative growth from 2008 through 2012.  The economy lost 3 million jobs in 2008, and another 4 million in 2009.  It added just over 2 million jobs per year from 2010 to 2013.   (Go here for these data). However, closer analysis reveals that 2014 job growth is still nothing to brag about and that reports of a "boom" are premature to say the least.

The years 1999 through 2013 did not display particularly strong job growth.  Between 1999 and 2007 the economy was at or near full employment.  Indeed, the unemployment rate only exceeded 6.0 percent (peaking at 6.3 percent) during one year of this period (2003), and then for only seven of the twelve months of that year.  (Go here for these data)  As the economy nears full employment, job growth naturally slows.  After all, employers must compete for a diminishing pool of qualified workers willing to work at current wages.  Such competition puts upward pressure on wages, dampening hiring.  These wage increases can also impact inflation, inducing the Federal Reserve to tighten the money supply in an effort to increase interest rates and slow economic growth, further reducing the demand for labor and resulting job growth.

By contrast, the economy has remained far from full employment for several years now, leaving room for faster growth in employment than was sustainable between 1999 and 2007, for instance. Nonetheless, job growth has been sluggish from 2008 through 2013.  Thus, thus, job growth that exceeds  that in the years 1999-2013 is not necessarily something to write home about.

Any assessment of the relative strength of last year's employment growth must begin by identifying a period, like 2008-2014, during which the economy strayed far from full employment. The obvious candidate for such a comparison is the period 1983-1984, during which the economy was recovering from the deep recession of 1981-1982.  During the 1981-82 recession, which followed high inflation and record high interest rates, the unemployment rate peaked at nearly 11 percent in 1982.

According to this website, job growth during 1983 and 1984 was significantly more robust than in 2014.  In particular, the economy added 3.45 million jobs in 1983 and 3.88 million jobs in 1984. Thus, the average job growth for these two years was 3.67 million. almost 25 percent higher than the 2.95 million figure for 2014.

Moreover, this gap actually understates the relative strength of employment growth in the two periods in question.  After all, the labor force was significantly smaller in 1983 and 1984 than in 2014.  That is, the civilian labor force averaged 112,547,000 for 1983 and 1984 combined and  numbered 155,922,000 for 2014. (Go here for these data).  Thus, the annual rate of job growth for 1983-84 was about 3.26 percent, compared to 1.9 percent for 2014.  Replicating the 1983-84 rate of job growth would thus have required the economy to create 5.083 million jobs in 2014, or 72 percent more jobs than the economy actually created that year.  Compared to 1983-84 anyway, employment growth in 2014 was about 2 million jobs short.  While not a "bust," such growth was, by historical standards, not really a "boom" either.

Obama's Actual Biography No Match for Coolidge or Reagan

The Actual Calvin Coolidge

 

The Actual Ronald Reagan

 

Coolidge/Reagan Wannabe?

Recent reports indicate that the Obama Administration has been re-writing the biographies of former Presidents on the White House website.  In particular, the Administration has been inserting references in such biographies to President Obama's purported accomplishments.  Indeed, the Administration has inserted such references in the biography of each President since Calvin Coolidge, with the exception of the biography of President Gerald Ford. 

Not surprisingly, some have criticized this form of self-promotion at the expense of prior Presidents, most of whom are not able to speak for themselves.   However, it is no surprise that President Obama would seek to associate himself with leaders like Calvin Coolidge and Ronald Reagan.  Simply put, both Presidents had economic records that put the current President to shame.  As explained previously on this blog, the Reagan Recovery produced the equivalent of 455,000 jobs per month between April and November 1984.  By contrast, the Obama "recovery" is producing jobs at less than a third of that rate.  (See here and here.)   Moreover, when Calvin Coolidge left office in 1929, the nation's unemployment rate was near 3 percent.  Even if the unemployment rate was twice the Coolidge rate, the American People would likely re-elect President Obama in a landslide.

Do Powerful Unions Enhance Job Growth? Of Course Not!

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In a perplexing analysis in today's New York Times, entitled "In Wreckage of Lost Jobs, Lost Power," David Leonhardt manages to turn both microeconomics and macroeconomics on its head, claiming, as he does, that stronger unions would somehow result in faster job growth and faster economic recovery. In so doing, he channels some of the discredited arguments that FDR and others made in favor of state-backed cartelization, including cartelization of labor, during the 1930s. Here are some excerpts of Leonhardt's analysis.

"But beyond these immediate causes, the basic structure of the American economy also seems to be an important factor. This jobless recovery, after all, is the third straight recovery since 1991 to begin with months and months of little job growth. . . . .

Why? One obvious possibility is the balance of power between employers and employees."

Later in the piece Leonhardt claims that:

"Study after study has shown that unions usually do benefit workers."

and

"For all their shortcomings, unions remain many workers’ best hope for some bargaining power."

Leonhardt does not explain how stronger unions and resulting "bargaining power" would speed job growth. "Union bargaining power" is simply a synonym for market power over the price of a very important input --- labor. Presumably unions would use such power to increase wages and/or foist other unwanted conditions of employment on employers. Because there are substitutes for American labor --- capital, foreign labor, or both, policies that raise the price of American labor will predictably cause firms to purchase less of it, either by substituting capital for such labor or exporting jobs to countries where wages are lower. (Moreover, foreign investors may choose not to invest here in the first place.) This is just basic microeconomic price theory, and Leonhardt offers no argument or evidence that the basic rules of price theory do not apply in this context. While unions may benefit workers who retain their jobs despite the wage-raising exercise of bargaining power, such a conclusion does not suggest that unions increase employment. Quite the contrary. The very exercise of bargaining power that raises wages and makes some employees better off also makes labor more expensive and causes firms to purchase less of it.

It should be noted that America experimented with the sort of policies Leonhardt advocates in the early 1930s. In 1933, Congress passed and FDR signed the National Industrial Recovery Act. The NIRA allowed firms, via trade associations, to adopt so-called "Codes of Fair Competition," and the NIRA required such codes to include provisions raising wages above the competitive level, as a means of stimulating the "purchasing power" of workers and thus jumpstarting recovery. However, none other than John Maynard Keynes suggested, in an open letter to President Roosevelt in the New York Times, that the N.I.R.A. "probably impede[d] recovery" by artificially raising wages and prices. According to Keynes, policies that stimulated aggregate demand would raise wages and prices, and not the other way around. Over a decade ago your not-so-humble blogger argued that the N.I.R.A. and other policies that raised wages and prices slowed the recovery from the Great Depression. See Alan J. Meese, Will, Judgment and Economic Liberty: Mr. Justice Souter and the Mistranslation of the Due Process Clause, 41 W. & M. L. Rev. 3, 48-49 (1999) (contending that the N.I.R.A.’s wage and price fixing likely exacerbated the Depression and slowed economic recovery).

Modern economists agree with Lord Keynes that the N.I.R.A.'s state-enforced cartelization of industry and labor impeded recovery. Thus, Christina Romer, immediate past Chair of President Obama's Council of Economic advisors, conluded that the NIRA "prevented the economy’s self-correction mechanism from working." See Christina D. Romer, Why Did Prices Rise in the 1930s?, 59 J. Econ. Hist. 167, 197 (1999). Moreover, writing in the Journal of Political Economy, economists Harold Cole and Lee Ohanian conclude that the N.I.R.A. and other New Deal policies, including the National Labor Relations Act passed in 1935, substantially prolonged recovery and inflated unemployment. See 112 J. Pol. Econ. 779 (2004) (For a prior version of the paper, go here.) Indeed, the article expressly identifies labor union "bargaining power" and resulting high wages as a culprit holding back recovery.

FDR, of course, did not have the benefit of the Cole/Ohanian/Romer analysis, thereby mitigating somewhat his responsibility for the unemployment and slow recovery that his policies wrought. Modern commentators who advocate such policies have no similar excuse.