Has Structural Change Contributed to a Jobless Recovery?

1. Has Structural Change Contributed to a Jobless Recovery? Erica L. Groshen Simon Potter with the assistance of Rebecca Sela Federal Reserve Bank of New York

2. The recent recession ended in November 2001 • In July 2003, the National Bureau of Economic Research (NBER) set November 2001 as the trough • Decision complicated by unusual “divergent behavior of output and employment” • NBER chose output as the appropriate standard

3. Since November 2001, we have been in a jobless (or job-loss) recovery Percent change from trough Percent change from trough Average of previous cycles Early 1990s cycle Current cycle Months after trough Source: Bureau of Labor Statistics, authors’ calculations Note: Shading indicates length of 2001 recession.

4. What is a jobless recovery? • Term used to describe aftermath of the early 1990s recession • Net job growth close to zero • Positive output growth, driven by productivity

5. AGENDAIf productivity is growing fast, why haven’t jobs come back? • The role of structural change • Reasons for more structural change • Weak job creation or widespread job destruction? • Focus on manufacturing

6. 1. The role of structural change

7. Recessions mix structural and cyclical adjustments • Cyclical job losses (temporary) • Recalls expected • Can be reversed easily • Structural job losses (permanent) • Require workers to switch firms, industries, sectors, skills, or locations • Adding jobs requires employers to set up new positions and find new workers

8. Two approaches to measuring structural vs. cyclical changes • Temporary versus permanent layoffs • Relocation of jobs between industries

9. Temporary layoffs underlay previous peaks and rapid recoveries in the unemployment rate Percent of the workforce, seasonally adjusted Percent of the workforce Civilian unemployment rate Unemployment rate without temporary layoffs Temporary layoff rate Source: Bureau of Labor Statistics, authors’ calculations Note: Shading represents NBER recessions.

10. In the 1990s and 2001 recessions, temporary layoffs contributed little to rise in joblessness Percent of the workforce, seasonally adjusted Percent of the workforce Civilian unemployment rate Unemployment rate without temporary layoffs 38% 30% 11% 52% 6% 25% Temporary layoff rate Source: Bureau of Labor Statistics, authors’ calculations Note: Shading represents NBER recessions.

11. How job flows classify industry adjustments during a recession and its recovery Procyclical flows Structural gains Structural losses Counter-cyclical flows

12. General Building Contractors Securities and Commodities Brokers Primary Metal Industries Railroad Transportation Oil and Gas Extraction Many industries had a cyclical experience during the early 1980s Procyclical flows Structural gains Counter-cyclical flows Structural losses

13. Current pattern: most industries in structural quadrants(NAICS basis, through January 2004) Structural gains Food services & drinking places Ambulatory health care services Procyclical flows Specialty trade contractors Educational services Scenic & sightseeing transportation Real estate Hospitals Administrative & support services Social assistance State govt. educational services Warehousing & storage Percent change in payroll jobsduring the recession (Mar 01-Nov 01) Couriers & messengers Membership associations Local govt.educational services Accommodations Motion picture & sound recording Air transportation Funds & Trusts Machinery Publishing, ex internet Computer & electronics mfg. Telecommunications Electrical eqpt. & appliances mfg. Internet publishing & broadcasting Apparel Textile mills Structural losses Percent change in payroll jobsduring recovery (Nov 01-Jan 04)

14. During earlier periods, structural and cyclical adjustments accounted for equal parts Source: Bureau of Labor Statistics, authors’ calculations

15. Structural adjustments now dominate Source: Bureau of Labor Statistics, authors’ calculations

16. 2. Reasons for more structural change • Investment overhangs • Effective counter-cyclical policy • Lean staffing

17. Investment overhangs:9 of 19 hot industries now “declining” Educational services Sightseeing Transportation Social assistance Administrative & Support Motion Pictures, Museums & Zoos ISP’s, Search Portals & Data Processing Funds & Trusts Internet Publishing & Broadcasting Telecommunications

18. Effective counter-cyclical policy • Tools: Monetary easing and/or expansionary fiscal policy • Effect: • Buffers normally cyclical industries • Structural adjustments remain • Evidence: Unusual strength of consumer durables expenditures and housing

19. Lean staffing: employers cut costs permanently • Recession is an opportunity to permanently restructure, not an event to be “weathered” • Reorganize production • Cull staff • Close inefficient facilities • Why? More incentives or pressure for managers • Corporate mergers/takeovers • Global competition • Pay tied to stock performance • Or, fewer constraints • Less unionization • Availability of temps, outsourcing, part-time labor

20. 4. Weak job creation or widespread job destruction?

21. Job destruction rates are no longer elevated; down to early-1990s levels Percent of employment, quarterly rate, seasonally adjusted Job losses (all employers) Source: Bureau of Labor Statistics Note: Shading represents NBER recession.

22. Weak job creation (falling since 2000) underlies the jobless recovery Percent of employment, quarterly rate, seasonally adjusted Job gains (all employers) Job losses (all employers) Source: Bureau of Labor Statistics Note: Shading represents NBER recession.

23. What conditions suppress job creation? • Uncertainty • Widespread structural change (which industries will grow?) • Geopolitical situation (energy prices, terrorism, etc...) • Crisis in corporate governance and accounting standards • Less funding for risky ventures -- no longer an issue • Stock market, IPO, venture capital, bond spreads • Impact: Long lags between job cuts and new hires

24. 5. Focus on manufacturing • Temporary layoffs • cyclical pattern much muted • Structural changes during recessions • strong shift toward structural losses

25. Temporary layoffs now a much smaller factor in manufacturing recessions Temporary layoffs as a % of manufacturing labor force Durable Manufacturing Non-durable manufacturing Source: Bureau of Labor Statistics

26. Mid-1970s recession: a cyclical pattern in manufacturing Leather Lumber & Wood Apparel Transportation Equipment Furniture & Fixtures Petroleum & Coal Instruments Electronics & Electric Equipment Food Fabricated Metals Durable Goods Nondurable Goods Primary Metals Industrial Machinery Source: Bureau of Labor Statistics, authors’ calculations, SIC basis

27. 1980’s recession in manufacturing, also cyclical Lumber and wood Electronics & Electric Equipment Transportation Equipment Primary Metals Printing & Publishing Leather Industrial Machinery Petroleum & Coal Durable Goods Nondurable Goods Tobacco Source: Bureau of Labor Statistics, authors’ calculations, SIC basis

28. 1990 recession in manufacturing: mostly structural, but industries that lost most during the recession did best during the recovery Rubber & Plastics Petroleum & Coal Furniture & Fixtures Lumber and wood Food Transportation Equipment Fabricated Metals Primary Metals Leather Durable Goods Nondurable Goods Electronics & Electric Equipment Source: Bureau of Labor Statistics, authors’ calculations, SIC basis

29. 2001 recession in manufacturing was purely structural, however you look at it (Through November 2002) Durable Goods Nondurable Goods Food Fabricated Metals Primary Metals NAICS Textile Mills Transportation Equipment Printing Leather Electrical Equipment & Appliances Computer and electronic products Job Growth in Recovery Apparel SIC Tobacco Furniture & Fixtures Food Chemicals Fabricated Metals Leather Petroleum & Coal Industrial Machinery Primary Metals Transportation Equipment Electronics & Electric Equipment Durable Goods Nondurable Goods

30. 2001 recession in manufacturing remains structural(NAICS Basis, through March 2004) Durable Goods Nondurable Goods Food Manufacturing Transportation Equipment Fabricated Metals Machinery Job growth in recession Primary Metals Paper Printing Leather Electrical Equipment & Appliances Computer & Electronic Products Apparel Textile Mills Job growth in recovery

31. Summary • Why is the recovery jobless? • Predominantly permanent, structural job losses • Slow job creation • Reasons for more structural change? • Investment overhangs • Counter-cyclical policy • Lean staffing • How did manufacturing fare? • Widespread structural job losses that persist

32. Prospects • Job growth will require more confidence • Robust job growth unlikely overnight—no boost from recalls • Ultimately, restructuring could lead to a long, robust expansion, as did the jobless recovery of the 1990s • However, growth may not be in manufacturing jobs

33. End of showNote:Copies of the August 2003 Current Issues in Economics and Finance on which this talk is based can be downloaded fromwww.newyorkfed.org

34. Policy options • Targeted temporary job creation credits • Better education/training to improve workers’ ability to adjust to change • Public or private wage “insurance” for workers--Kletzer and Litan • Restore confidence in corporate governance, accounting, business environment

35. Self-employment has surged during the recovery

36. Is it offshoring? • A weak labor market, plus spread to new industries means workers have higher losses and more feel at risk • Other causes of displacement are more important: technology, taste shifts, competition, business conditions • Numbers still small (and omit job gains from trade) compared to normal flows, and there has been no surge of job loss • Reflects our specialization in innovation (we constantly spin off mature products, go on to the next big thing) • Final product trade is all offshored, so intermediate-good trade means we keep some (the highest value-added) jobs • Will grow, but within limits: • not everything can be offshored (e.g., confidential, hard to monitor, need for face-to-face contact, etc.) • much is experimental now, some will fail • weak dollar, looser labor market will slow process

37. Unemployment rate by educational attainment Percent of the labor force, seasonally adjusted Less than H.S. High school diploma Some college Bachelor’s degree or greater Source: Bureau of Labor Statistics Note: Shading represents 2001 recession.

38. Median years tenure of employed workers Male Total Female Source: Bureau of Labor Statistics

39. Discouraged workers have not increased as a share of those out of the labor force Source: Bureau of Labor Statistics, authors’ calculations

40. Why are cyclical temporary layoffs disappearing? • UI rule changes • Manufacturing jobs declining • Unionization declining • Rise of temporary help services • Opportunistic firing/closings • More structural changes during recessions

41. Mid-70s Cyclical Expanding Industries Declining Industries Counter-cyclical Source: Bureau of Labor Statistics, authors’ calculations

42. Early 1990s Cyclical Expanding Industries Declining Industries Counter-cyclical Source: Bureau of Labor Statistics, authors’ calculations

43. Measures of available jobs show uptick in second half of 2003 Current cycle Current cycle Early 1990s cycle Early 1990s cycle Current cycle Early 1990s cycle Early 1990s cycle Current cycle Early 1990s turning point Current cycle 1990s turning point Source: Conference Board, Manpower Inc., BLS Note: Shading indicates length of 2001 recession.

44. Temporary Layoffs: Manufacturing Temporary Layoffs in manufacturing, % of Total Labor Force Durable Manufacturing Non-durable manufacturing Source: Bureau of Economic Analysis

45. Temporary Layoffs: Period 1 Long term Temporary Layoffs: Period 2 12 month frequency Source: Bureau of Labor Statistics

46. Temporary Layoffs in Manufacturing: Period 1 Long term Temporary Layoffs in Manufacturing: Period 2 12 month frequency Six month frequency Quarterly frequency Source: Bureau of Labor Statistics

47. 1990-1991: Manufacturing Only(NAICS Basis, 22 months) Plastics Wood products Textiles Food Furniture Machinery Petroleum & Coal Fabricated Metals Transportation Equipment Primary Metals Computer and electronic products Durable Goods Nondurable Goods

48. Current Recession: Manufacturing(NAICS Basis, through November 2002) Food Fabricated Metals Transportation Equipment Primary Metals Textile Mills Printing Electrical Equipment & Appliances Computer and electronic products Leather Apparel Durable Goods Nondurable Goods

49. 2001 Recession: Manufacturing (SIC Basis, through November 2002) Tobacco Fabricated Metals Chemicals Food Furniture & Fixtures Petroleum & Coal Leather Primary Metals Transportation Equipment Industrial Machinery Electronics & Electric Equipment Durable Goods Nondurable Goods