Gimme an "L"!

The December jobs report came out, and while the unemployment rate is down significantly ("Yay!"), the portion of the population with jobs didn't budge from November (in other words, the number of jobs grew just about as fast as the population).

That means that the reason for the improving unemployment rate isn't that lots more people are finding jobs. It's that more people are giving up, or finding their way to early retirement, or making it onto disability, or perhaps slipping away into the informal sector, where they have an income but don't show up in the employment statistics (though this paper disputes the importance of that last factor).

It's been this way for four-and-a-half years. From December, 2007 to June, 2009, jobs fell away like limbs getting lopped off the Black Knight in Monty Python's Holy Grail. Since then, we've basically moved sideways. The unemployment rate has come down from 10% to 6.7%, while the portion of the population with jobs has stayed at the low level it reached in 2009.

 

Civilian employment-population ratio --
the percentage of the civilian adult population that is employed
(from Bureau of Labor Statistics)

We've managed to keep more limbs from falling off, but we're making basically no progress on growing new ones.

How long is this going to go on?

My colleague Jason Antrosio sent me to a post by Kaushik Basu about the possibility of an L-shaped recovery.

In the good old days (the first several recessions after World War II), recessions were V-shaped: the economy contracted quickly, a lot of jobs were lost in a short time, but then it rebounded quickly. Many of the job losses were layoffs rather than firings: "We don't have enough work for you for at least the next three months; we'll call you back when we need you." And after several months, people would be called back, and the economy would go along it's merry way as if nothing had happened.

In 1980-1982 we had a W-shaped recession, with a relatively small dip at the end of Carter's presidency, a brief recovery, then a deep second dip early in the Reagan years.

Our next two recessions were shallow U-shaped affairs: the total job losses weren't that high, but it took a long time to get down to the bottom of the job market, then a long time to get back.

Now the concern is that this will be an L-shaped recession: the economy falls, and it doesn't get back up for ... a long time.

I can see a case for an L, but I probably build my case on different foundations than most people who worry about L's.

There's a menu of common reasons that economists point to in looking for an explanation:

• The article talks about the incorporation of huge labor forces from developed countries into the global economy and how that's a drag on rich-country economies.
• There's also a passing reference to the need for "structural reforms" in Japan.
• Some people talk about demographic shifts, with rich countries having older populations and a smaller share of people in their prime working years.
• There's the inequality thread: wages have stagnated for most people while productivity has risen strongly, and that's keeping demand low. (This Jared Bernstein paper actually ranges much wider than that, but it includes that argument. There's also a literature that cites lower levels of initial inequality as a factor allowing some poor countries to grow out of poverty faster than others.)
• The inequality is feeding disproportionate political power, which in turn locks us into policies that benefit a few but damage growth.
• Fast-advancing technology replacing more and more labor, faster than the economy can come up with new things for the displaced labor to do (and get paid for).

I'd say all of those have some merit (though the "structural reforms" thing seems to me more of a symptom—if growth were good, the fiscal drag of current policies would largely go away; the other problems on the list aren't magically solved by growth itself).

But there's a big factor omitted from all mainstream discussion, which is that resource constraints are making it harder for economies to grow. Putting it in rather simple terms, cheap energy can support widespread high-paying jobs, while expensive energy can only support a small number of high-paying jobs; if there are going to be lots of jobs, they can only be low-paying. So even though the working-class is generally stagnating in the rich countries, their wages are still too high for the energy regime we've been in for about 10 years now; and since laws and expectations and fairness all make it hard to reduce wages in rich countries, we're stuck with slow growth. In poor countries, wages are higher than they were, but still a lot lower than here, and thus low enough for employment to expand even when energy is expensive.

(And look at one of the counterarguments to the concern about robots: Sure, machines will reduce labor's share of income, but once we remove the expense of labor for producing things, we'll be living in a world of abundance, so the median person will nonetheless have more access to stuff than today. Without the merest consideration of the idea that providing medical care, driving people around, growing their food is still going to take energy and other resources, and there are tougher limits on replacing that than on replacing human labor.)

So, yeah—maybe an L-shaped non-recovery.

 

But even that is implicitly asking the wrong question, by assuming that recovery means return to GDP growth rates that were normal in the post-WWII era. If you take resource constraints seriously (not just "Are there limits on how much we can get our hands on?", but, "Are there limits on how much we can burn without ending up really, really sorry?"), then you're led pretty quickly to a very different question. Not, "How do we get the economy growing again?", but, "How do we arrange a decent standard of living for as many people as possible in a system that feels basically fair to most people, while limiting our ecological impact?"

That may sound like a sustainability question or an environmental question, because of the last clause. But it's also a deeply economic question. We have the technological ability to do less in total and still have enough for a decent material standard of living for all. But markets aren't good at answering the question of how to do that, and reliance on the state has its pitfalls, too.

So I don't have an easy answer, but I think it would help if more economists were asking the right question.