Eye on Innovation, Design and Technology: Has Structural Change Contributed to a Jobless Recovery?

March 06, 2004

Has Structural Change Contributed to a Jobless Recovery? - Federal Reserve Bank of New York

One of the big issues to be debated in the upcoming presidential election is the slugish job growth. There are a number of sources that attempt to document why economic output is growing at a fast rate but there is not a parallel increase in job growth. Some writers explain that this is simply a delayed effect issue. I feel that this is more an structural shift issue. In the title article by the Federal Reserve Bank of New York, Erica L. Groshen and Simon Potter provide detailed and quantitative documentation showing how this recovery is happening at the time that there is a wrenching structural shift going on in the economy

How, then, do the job flows in the 2001 recession and subsequent recovery compare with those in the early 1980s? Chart 4 shows the distribution of major U.S. industries for the recent period. The difference from the pattern of the early 1980s is quite stark: now, the industries cluster heavily in the two structural quadrants. Most of the industries that lost jobs during the recession—for example, communications, electronic equipment, and securities and commodities brokers—are still losing jobs. Balancing the structural losses of these industries, however, are the structural gains of others. For example, nondepository financial institutions, an industry grouping that includes mortgage brokers, added jobs during both the recession and the recovery. The trend revealed in Chart 4 is one in which jobs are relocated from some industries to others, not reclaimed by the same industries that had lost them earlier. The chart provides persuasive evidence that structural change predominated in the most recent recession

Key to note are two of the industries that are still losing jobs: Communications and electronic equipment, which are undergoing further unwinding of the internet/telecomunications overinvestment bubble. These industries will have to go through an adjustment similar to the one the U.S. Manufacturing industry has been undergoing for many years. One of the most little known facts about U.S. manufacturing is that the % GDP output devoted to U.S. manufacturing has hardly changed since the 50's. What has changed is the number of people employed in manufacturing. There is one simple explanation: productivity increases. Now, the internet/telecomunication industry overinvestment and hiring frenzy bubble has put the industry in a situation where they have also accelerated the consolidation and adjustment process that all industries go through. Thus, this is the ultimate irony of "internet time". The time period in which the technology industry will have to adjust will be much less than the time that other industries had to cushion the structural changes. The related internet bubble excesses on the brokerage and financial services industries have created a similar situation. Another quote

The large proportion of industries that have switched from fast growth to steady decline suggests that overinvestment in some industries during the 1990s may in fact be a key force suppressing job growth.

The analysis concludes with a cautiously optimistic tone

Despite the paucity of new jobs, two marked divergences from the 1991-92 recovery may have mitigated the harshness of the current experience for workers: Unemployment is relatively low, and real wage growth has remained surprisingly strong for a recession and recovery.
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.

Posted at 11:56 AM in Current Affairs, Economy | Permalink

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