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Growing Jobs, Revisited

Back in October 2010, job creation was at a complete standstill.  The bottom of total employment was hit in February of that year and little had changed since.  A simple analysis came through Barataria from Gary Shilling designed to predict when the turnaround might possibly occur – sometime after the economy (as Gross Domestic Product, GDP) started to grow at a rate of 3.3%.

Since that time, 2M jobs have been created in the economy and the headline unemployment rate has fallen to 8.5%.  It feels like some improvement, if not much.  Yet many people feel it can’t be a real decline in unemployment in part because the economy itself is not growing much (running an estimated 1.8% GDP growth in 2011).

Is there real job growth, or is the regression line from all the postwar data presented by Shilling telling us it can’t be real?  My own analysis, which at the time pessimistically showed that higher growth might be necessary to grow jobs, may actually be telling us that job growth is indeed real – because it was so anemic over the previous decade of the Managed Depression, starting in 2000.

The background is complex without reading the original post.  Simply put, Shilling started from the typical observation that job growth is a lagging economic indicator, and that the unemployment rate never falls unless there is some economic growth.  Plotting all the data on a graph he came up with a regression line that suggested that 3.3% GDP growth, year over year, was the point where we would see the unemployment rate fall.

I noticed in his graph that the most recent data suggested an even higher economic growth was necessary – more on the order of 5.1% per year – before unemployment fell.  It seemed reasonable at the time that we were in a different economy that may not respond the same way as all the other postwar years.

But what if we turn this argument on its head and start with the assumption that this Managed Depression began a decade ago?  It seems reasonable that job growth could be lower until the economy restructured, which it may be doing now.  Below is the data on change in GDP over the last decade versus the unemployment rate, from the St Louis Fed:

Now let’s take the previous Barataria observation, that in the last decade unemployment has lagged typical Postwar behavior, and turn it on its head.  What if we are in the same basic economy, but experiencing a higher than average rise in unemployment due to the need for restructuring that was not occurring.  Rather than assume a higher GDP growth is necessary than before, what should the unemployment rate be, assuming the same regression holds?

The answer is that we should have an unemployment rate of about 7.2% right now, which is to say significantly lower than the 8.5% we are happy to have hit in December.  The difference between the two is about 1.7M jobs – nearly as many as were created in all of 2011.  Naturally, this assumes the headline unemployment rate is a useful number, which for the sake of this analysis (and consistency) it probably is.

In other words, the job creation we are seeing now may well be due to pent-up demand for employees, as reflected in the total number of hours worked by those with jobs.  Getting us back to an even keel could generate a significant number of jobs even before there is a big change in GDP growth.

This implies that job growth may not lag economic growth as we restructure, but may lead it. That may seem very backwards, but in a consumer economy that crashed in part because of a severe job shortage it could easily happen.

Should we take this as more evidence that job growth will continue into 2012?  We should never expect anything unless there is real economic growth, and that remains what we should hope to accelerate in the coming year.  However, there is reason to believe that the last decade of anemic job growth has created pent-up demand for workers that might actually lead the economy into the new year.

(Assuming Europe doesn’t bring us down, as always.  Sigh.)

16 thoughts on “Growing Jobs, Revisited

  1. This is interesting, but I’m not sure if it makes sense. Employment always lags a recovery, but if we really did gain 2 million jobs in 2011 I think I see what you mean. I think what you are getting at is that if things are turning around this is different than usual, right?

    • Yes, you have it. We should not be growing jobs at the rate we are – so I asked why would this be happening. I am convinced it’s real (took a few months) but it defies explanation. I realized that we have been lagging for a decade, so that might well explain it. And it does.
      But this is totally backwards from what anyone would expect, so we it’s worth being a bit circumspect. But …. we don’t have Depressions like this all the time, so why would things be the same as always? If there’s one thing I learned through this process it’s that Conventional Wisdom has not explained very much. I think that’s still going on right now.
      Jobs leading the restructuring / recovery? Why not?

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  3. I think you have hit on the growing concern that there is a two-tier job market – those with jobs are working longer hours but those without can’t get hired. There are still many reasons this might be true and anecdotally (sp?) I think it is but perhaps it is changing some. That may not be a restructuring of the economy but a natural evolution.

    • Yes, that is what I think may be happening. There is little doubt in my mind that job growth is ahead of the total economy, at least in traditional “recovery” terms. That alone is very strange – but it may not be unreasonable at all.

  4. OK if (big if) you believe that unemployment is falling then you are saying that there is not enough growth to support it, right? That sounds like election year politics to me.

    • If you think that the job growth is faked for the election year, I don’t think that is the case. Remember, these are not just government stats but they are verified by ADP (a payroll processor). It has been accelerating a bit since July, and we’ve added over 650k jobs since then – so it’s been going on for a while. It’s real. But it doesn’t match up with real (inflation adjusted) increases in GDP, which are still pretty anemic. I admit this.
      Either it’s a fake (which I really doubt now) or there is something unusual happening. I’m presenting the case for the latter, which I do believe now. It’s not like job growth is especially strong, but it is stronger than we should expect in this rather weak economy.

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