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.)
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