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The Decoder: Jobless Recovery


It sounds simple, but what causes it?

Unemployment remains high but there are signs the economy is starting to expand again. Are we in a jobless recovery?

Economists are undecided. Columbia University economics professor Edmund Phelps recently dismissed the notion of the jobless recovery as "scare talk," arguing that any significant GDP expansion will bring employment back. Others disagree, arguing that as long as worker productivity continues to increase as it has in recent months, companies will have little incentive to hire.

It's not so surprising that economists don't agree, because it turns out that economists don't even agree on exactly what causes a jobless recovery, nor are they certain how to emerge from it.

It's a simple concept: A jobless recovery happens when the economy rebounds without creating more jobs. But how? How can things really get moving again if one in 10 people are out of work?

The term "jobless recovery" is relatively new. Its first appearance in the media, according to a Factiva search, was in the New York Times on October 12, 1991. The story was pegged on sluggish retail sales, and the conclusion was that the economy was expanding because of productivity, not employment.

The phrase took off, and the jobless recovery quickly became associated with the economic malaise during the final stretch of George H. W. Bush's presidency. Jobless recovery returned in the early 2000s after the recession following the bursting of the tech bubble. And now it's back again.

We used to recognize the end of a recession by a jump in payrolls, but recent recessions have ended while unemployment remained unchanged -- or even worse, increased. Worker productivity rises during a jobless recovery, which gives companies greater output with the same number of employees.

It's the root causes of increased output that have economists at odds. Sure, you're bound to work harder if you're worried about getting laid off, but that's not enough to account for the dramatic rise in output.

Improvements in technology during the past several decades have contributed considerably to increased productivity. From manufacturing to data analysis to stock trading, bots have replaced humans and gotten considerably more work done.

Tough economic times call for creativity with efficiency measures, and many companies have focused on improving by retraining or shifting resources. A recent Wall Street Journal story profiled D'Addario & Co., a manufacturer of guitar strings, which is able to produce 15% to 20% more product with fewer workers. "A host of efficiency moves -- such as teaching many workers to inspect their own work, which let D'Addario go from 17 inspectors to 10 -- has saved so much labor that there's no need to hire now."

Another root cause of increased output could be free trade. As more companies have sent jobs offshore in search of cheaper labor costs, they're able to maintain or increase output without replacing jobs on US soil.

Some economists surmise that productivity increases because of structural changes in the labor market. In an August 2003 paper, economists at the Federal Reserve Bank of New York examined the jobless recovery following the 2001 recession. They found that the job losses were permanent rather than temporary, which forced workers to change jobs to the industries that were creating new jobs. Since job creation takes longer than rehiring, it takes longer to realize a jump in employment.

So how do we kick-start job growth again? The NY Fed economists in 2003 had this conclusion: "Although our analysis has focused on the recent past rather than the future, our findings suggest that a return to job growth may require a mix of two ingredients: improved financing options for riskier ventures and resolution of current uncertainties, including time for the dust to settle from all the recent structural changes."

We got that improved financing for riskier ventures, but it came back to bite us. Cheap money fueled the housing boom and the creative financial products that led to the banking crisis and the recent recession.

And now, two years after the recession began, not only are companies not hiring, they're still firing. In recent weeks, companies including Verizon (VZ), Lockheed Martin (LMT), Sallie Mae (SLM), Sun Microsystems (SUNW), the New York Times Co. (NYT), and Pfizer (PFE) have all announced layoffs.

And so here we are again in a jobless recovery. Maybe. Or maybe not. Just get back to work.
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