The President and Job Growth

According to Economic Cycle Research Institute President Bush is going to have some problems with jobs growth in the coming months. The problem is, in my opinion, three fold. First, the economy is going to have mediocre growth at best for the next several months and the second is that there appears to be a structural change in employment going on. Third the surge in productivity.

The first problem and its implications for employment should be fairly obvious. The economy is growing but at a less than normal pace. The primary reason appears to be, at least in part, higher oil prices. Higher fuel prices impact just about every facet of the economy. Consumers seeing higher prices at the pumps tend to cut back on other spending (the income effect of a price increase) and tend to do other things than drive places and spend money at those other places (the substitution effect). Thus, a decrease in consumer expenditures. Firms that rely on trucking to get their goods from the manufacturer to the retailer see an increase in prices and react accordingly there as well.

The second problem is not quite so obvious when looking at the gross statistics. The bottom line is that there have been far more structural changes to employment with this last recession than previous recession. A layoff is due to cyclical fluctuation and the employer will bring back the employee as soon as the cycle changes. A structural change is when a worker is not simply laid off, but that the job is completely eliminated and the worker has to move to another part of the economy. With the last recession Groshen and Potter find that 79% of the job losses with the last recession are structural whereas with previous recessions it was about 50%. Also consider, that in the early 1990’s (right in line with the recession under Bush I) the percentage of structural job loss was 57% and at that time there was a longer time from when the recession ended to when job growth started to gain strength.

Like the increase in energy prices, the surge in productivity is pretty obvious as to its impact on employment. It means that with the same number of workers more can be produced. Now long term this might not mean depressed levels of employment since higher profit levels will induce other firms to enter a market and drive down prices. Still, it can have a short term impact.

I am less persuaded by ECRI’s view that jobs overseas is playing a significant role. While there are jobs being offshored, it is not clear that the net loss is large enough to contribute significantly to the stagnation we have seen in the labor markets.

So while the jobs numbers from last week were good, it is unlikely to mean that the prospects for job growth for the next several months are good. Further, these are things that the President…any President can’t do much about. So when some pundits go bonkers on the jobs numbers try to keep some of this in mind. What this is suggesting is that the economy has changed from 1999 and expecting the same employment levels that were seen in 1999 is just…well bonkers.

FILED UNDER: Economics and Business
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Ed says:

    James, interesting post but a couple of counter arguments.

    1) Oil prices did jump, but they’re on the way back down now;

    2) Part of the reason for the sluggish summer months had to do with an overbuild of inventory by manufacturers. That inventory is working its way down and should be at more normal, seasonal levels in the very near future.

    3) With Bush’s re-election, global-multinational businesses can do better planning in terms of tax rates, regulatory costs, etc., so budgets may find themselves less restrained than they’ve been over the past several months.

    By other measurements, it seems like there’s a chance for really good growth in the near term.

  2. M. Murcek says:

    NORMAL job growth – whatever that is. During the dotcom boom, we were told the “old” economic models were out the window. After the dotcom bust, we were told the “old” models never went away.

    Productivity can only go up or remain flat (in the modernized world), except for a huge terrorist attack, a decline in the education level of the population or a steep recession / depression in which there are vastly fewer producers doing much less producing (even then, productivity, as a ratio, might be flat or climb)

    As long as there are demagogues telling people there will be a return to 23 dollar an hour broom leaning jobs for unionized highschool dropouts, there will be people holding out for exactly that.

  3. Dave Schuler says:

    Job growth over the last several quarters has tended to be in two areas (government and health care) that share some qualities. Small numbers of highly-compensated workers. Credentialing and legal restrictions on entry (ever tried to set up your own government?). The two sets of factors are not unrelated. It’s not a formula for sustained growth.

  4. Anjin-San says:

    We also need to consider the overall cost to society of the pressures being brought to bear on corporate employees which lead to much of this much vaunted increased productivity.

    Professionals who are saddled with large debt loads & don’t have much in the way of lateral job mobility are having huge workloads dumped on them.

    If someone sees their workload go up 25% without compensation and is willing to endure this out of fear of layoffs or oursourcing, well of course productivity goes up.

    What are the downstream costs to society? Kids don’t see much of Mom & Dad, who are struggling to keep everything together.
    We are raising a generation of overweight, sickly kids who spend time in front of the TV or playing video games because the parents just don’t have the bandwidth to raise kids properly. Hell now we have DVD player in our SUVs. No need to waste energy talking to the kids in the car now! Family values!

    How many workers are trashing their health to hang onto their jobs? How many unnecessary heart attacks go into producing the bottom line that allows the CEO to get that 10 million dollar Christmas bonus?

  5. Dave Schuler says:

    Thank you for making that point, Anjin-San. It’s a point I’ve made myself from time to time. There are many other areas of society that are done harm by the kind of increased productivity you’re talking about—anything that requires a level of volunteerism for survival.

  6. sofla says:

    The GOP needs better job numbers in 2006, so there’s some breathing room now for a while, if the job numbers are disappointing.

    Another factor is the dollar’s decline, and whether the Fed might need to raise rates to counter that.