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Growing Jobs

When the National Bureau of Economic Research proclaimed that the recession is over, not many people believed them.  After all, unemployment still stands at levels we haven’t seen for many years – and very few businesses predict they will do much hiring in the near future.  But looking only at GDP (the sum of all goods and services made in the economy) it appears that somewhere around June 2009 we started having positive economic growth.

That’s great, as far as it goes, but what does it take to create jobs?  Running a little regression or two can give you a few potential answers – and none of them look all that good right now.

First, the source of today’s perspective:  John Mauldin’s excellent “Thoughts from the Frontline”.  Mauldin is an excellent analyst who has the guts to give his column over to people who have unique perspectives, even if he doesn’t always agree with them.  The result is just about the deepest and most enlightening conversation you’ll find on the internet.

In a recent piece, he offered a simple graph from his friend Gary Shilling.  The plot was designed to answer a simple question: what level of economic growth has been necessary in postwar USofA to drop the unemployment rate?  Below is exactly what Shilling produced, showing change in GDP year-over-year on the x axis and change in unemployment rate year-over-year on the y axis.  It’s a bit strange because a positive y means that the unemployment rate went up, so be careful as you read it:

We can see from this that there is a reasonable regression showing that unemployment starts to fall when GDP growth tops about 3.3%.  That’s an interesting figure because we just hit it this year – and we’re not expected to maintain GDP growth higher than that for quite a while.

If that’s not depressing enough, I noticed something in these data right away.  If you look at the big cluster of points from 1949 and you have been staring at recent data far too closely you may notice that recently we’ve been on the high side of the regression line drawn.  After digging through unemployment rate figures from the St Louis Federal Reserve and GDP figures from the Bureau of Economic Analysis, I made my own chart of the same type using using data only from 2000-2010:

We can see from this that, recently, it takes about 5.1% growth in GDP year-over-year to produce a drop in unemployment.  Why would recent data be higher?  If you accept that our economy is different than the manufacturing based economy of the 1960s you can make the case for emphasizing more recent data.  It also is reasonable to assume that companies are more careful about hiring in a Depression – and while we’ve had some positive economic growth in the 2000s it’s important to restate that all of it can be explained by Federal deficits and home equity withdrawals, leaving the rest of the economy in fairly rapid decline over the last 10 years.

There are many reasons for the upward shift, but I think that the real cause is the high overhead cost per employee.  This probably has been constantly creeping upward through increased health care costs, higher pension costs, more employee training (mandated and not) and higher recruitment costs.  I do not have good numbers on where we are today with employee overhead costs (estimates run about 70-80% of salary on average), let alone historical figures, so please take this as supposition.  However, I am certain that reducing employee overhead will make a more fluid labor market with fewer barriers to entry, and thus more jobs.

What does it take to make a good dent in the unemployment rate?  At least 3.3% growth in GDP, which we have seen in 2010.  But it may take as much as 5.1% change in GDP – which we haven’t seen since 2007.  None of this will take place if, as many predict, we slip back into negative growth by early 2011 and have a “double dip” recession.  Fasten your seatbelts.

26 thoughts on “Growing Jobs

  1. Excellent original research. I’ve been wondering about this same thing for a while but never knew how to get the answer.

    I think the difference between 3.3 and 5.1 is probably what I read between the lines in this post – the difference between sustainable growth like we used to have and the “tape painting” that the government has done with the GDP figures. It goes back to what you were writing about last week.

  2. Yes, this is all related. There’s been a lot of new data and new perspectives on the economy lately – I’m reporting the ones that get me thinking and give me a chance to add my own research to the topic.

    I think that this net difference in base GDP growth to affect unemployment could possibly be related to the fact that we’re playing with the numbers and doing too much economic stimulation (without a real money multiplier!). I did leave that in there, if vaguely, so that you can draw your own conclusions. However, I do think that if there are high barriers to job creation the relationship will be very out of whack and I’m going to stay with that as the main problem.

    I’ll go as far as to say that upwards of 5% GDP growth YoY is necessary to make any kind of dent in the unemployment rate, however. That looks pretty solid to me no matter what the cause.

  3. I am left with one big question: where do the numbers fall when productivity is calculated in the mix? My guess is that the higher GDP figure correlated to reduced unemployment is related to steady improvements in productivity. Does anyone remember the functionality of Lotus Notes? Consider the impact of desktop and laptop computers and steadily more sophisticated software.

    Lower overhead is a common-sense answer to high unemployment and agree that keeping it in check would improve the general picture, but employers have been pushing higher percentages of health costs back on employees and pensions are disappearing form of compensation. It’s old data, but the Dept of Health and Human Services reported that premium costs for employees increased 65.2% for singles and 55.8% for families between ’96-’02. The trend has undoubtedly continued. Employers have had their contributions increased, but the tax deductibility of those contributions has increased.

  4. I don’t understand how anyone can claim that the recession is over when there is still so many jobs being lost all the time. I guess that the people in charge can make words mean whatever they want them to mean but it doesn’t make any sense to me to use it to mean something so technical. The recession or depression is over when people are back to normal or something like it, and if there really is a “new normal” then how can you say that the recession ended.

    Your saying here that we have to have really high growth if we’re ever going to get the jobs back we once had. I can believe that because that is what it will take to turn people’s attitudes around. I guess that is what matters the most right now.

  5. Bruce: Productivity is a good addition. My hunch, when I latched onto this one graph, was that we were looking square into the eyes of another perspective on the “money multiplier” problem, or why Fed stimulus just doesn’t work as well as it used to. Somehow, this is all related, I’m sure.

    Anna: I agree, the announcement that the recession is over was pretty silly at best, but they have their technical definitions – all of them backward looking. Real helpful, ain’t it? 🙂

  6. Also, I forgot to include this link for some reason – it’s another post with a lot of fun graphs:

    https://erikhare.wordpress.com/2010/07/07/job-creation/

    “Overall, the chart looks a lot like 1980 when it comes to claims for jobless benefits. As the year progresses the simplest thing to watch if you are looking for signs of a recovery is for initial claims to drop below 450k per week, where it has been for all of 2010.”

    (they haven’t consistently for the 3 months that have passed since this was written)

  7. On behalf of stimulation projects, thank God for Road Construction. It puts lots of folks into the economy with local jobs using U.S. raw materials, well, more or less. So the crude was imported, but it was cracked here. Road Construction is the first thing the government gets going during a recession because of the subliminal message that “Hey, people are working, lots of jobs!” Well, be that as it may, shovel ready projects provide good employment for people who will pay taxes, and who know how to use a shovel.

  8. I also read an editorial from a small business owner a while back that basically said that even though the government is doing some things to help small businesses hire again, the overhead is way too high for it to be worthwhile. That definitely sounds like an argument in favor of – if not a government healthcare program – at least having individual access that’s not tied to your employer.

  9. Erica: Neat interactive graph, thanks! That was especially good after Bruce’s comment here – it all goes back to productivity at some point. I do agree that decoupling health care completely from work is one of the most important things we can do – a point Obama half-heartedly was trying to make when he emphasized health care reform so early in his term. We didn’t quite get what we needed on that score, but we got something. Hopefully it’ll get the ball rolling.

    Bob: A solid program of construction is always a good idea when we have a situation like this, and I hope we’re doing enough to make a difference. I saw today that initial unemployment claims are still around 450k, which is an awful lot of people looking for work. Ug.

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  14. Is it just my weird viewpoint, or is there another way to look at this? Forget about unemployment – plot the whole thing against employment figures. I am no economist (as anyone who knows me will tell you), yet I can’t help thinking that employment rates are a better measure of economic health. We only focus on unemployment because that figure is “bad” and therefore captures attention – if we spent more time trying to improve the “good” numbers (i.e. employment instead of unemployment) there might be scope for more effective policy.
    Of course, I am no economist – just a chap with a view.

  15. John:

    Thanks for stopping by with your view – you’re asking a very good question.

    I’m attempting to relate two things that are often viewed as very separate. GDP figures are a measure of how the rich get richer and employment figures are a measure of how the poor get by.

    I’ve given up on getting our material-obsessed culture to simply focus on employment, as you suggest, 3even though it is at least as important as GDP. Tying the two together it about as good as I feel we can hope for.

    I do think that the severity of this Depression is changing that, if slowly. I think that you are quite right to say that employment is what matters – how everyone can contribute to the world. That is gradually becoming better understood, too. One can hope.

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