When the National Bureau of Economic Research proclaimed that the recession is over, not many people believed them. After all, unemployment still stands at levels we haven’t seen for many years – and very few businesses predict they will do much hiring in the near future. But looking only at GDP (the sum of all goods and services made in the economy) it appears that somewhere around June 2009 we started having positive economic growth.
That’s great, as far as it goes, but what does it take to create jobs? Running a little regression or two can give you a few potential answers – and none of them look all that good right now.
First, the source of today’s perspective: John Mauldin’s excellent “Thoughts from the Frontline.” Mauldin is an excellent analyst who has the guts to give his column over to people who have unique perspectives, even if he doesn’t always agree with them. The result is just about the deepest and most enlightening conversation you’ll find on the Internet.
In a recent piece, he offered a simple graph from his friend Gary Shilling. The plot was designed to answer a simple question: what level of economic growth has been necessary in postwar USofA to drop the unemployment rate? Below is exactly what Shilling produced, showing change in GDP year-over-year on the x axis and change in unemployment rate year-over-year on the y axis. It’s a bit strange because a positive y means that the unemployment rate went up, so be careful as you read it:
We can see from this that there is a reasonable regression showing that unemployment starts to fall when GDP growth tops about 3.3 percent. That’s an interesting figure because we just hit it this year – and we’re not expected to maintain GDP growth higher than that for quite a while.
If that’s not depressing enough, I noticed something in these data right away. If you look at the big cluster of points from 1949 and you have been staring at recent data far too closely, you may notice that recently we’ve been on the high side of the regression line drawn. After digging through unemployment rate figures from the St Louis Federal Reserve and GDP figures from the Bureau of Economic Analysis, I made my own chart of the same type using using data only from 2000-2010:
We can see from this that, recently, it takes about 5.1 percent growth in GDP year-over-year to produce a drop in unemployment. Why would recent data be higher? If you accept that our economy is different than the manufacturing-based economy of the 1960s you can make the case for emphasizing more recent data. It also is reasonable to assume that companies are more careful about hiring in a Depression – and while we’ve had some positive economic growth in the 2000s it’s important to restate that all of it can be explained by Federal deficits and home equity withdrawals, leaving the rest of the economy in fairly rapid decline over the last 10 years.
There are many reasons for the upward shift, but I think that the real cause is the high overhead cost per employee. This probably has been constantly creeping upward through increased health care costs, higher pension costs, more employee training (mandated and not) and higher recruitment costs. I do not have good numbers on where we are today with employee overhead costs (estimates run about 70-80 percent of salary on average), let alone historical figures, so please take this as supposition. However, I am certain that reducing employee overhead will make a more fluid labor market with fewer barriers to entry, and thus more jobs.
What does it take to make a good dent in the unemployment rate? At least 3.3 percent growth in GDP, which we have seen in 2010. But it may take as much as 5.1 percent change in GDP – which we haven’t seen since 2007. None of this will take place if, as many predict, we slip back into negative growth by early 2011 and have a “double dip” recession. Fasten your seatbelts.