For release: Jan. 06, 2004

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Will Jobs Ever Return to the "Jobless" Recovery?

St. Louis — The last two U.S. economic recoveries have been accompanied by lackluster job growth. Although significant structural changes in the economy might be to blame, there is no evidence that future economic recoveries will be jobless, says an economist with the Federal Reserve Bank of St. Louis.

The economist is Kevin L. Kliesen. His comments appear in the January publication of The Regional Economist, the St. Louis Fed's quarterly magazine of business and economic issues.

Historically, economic growth has been much faster right after the end of a recession than any other time in the business cycle. If so, why have employment gains been so tepid after the 1990-91 and 2001 recessions?

Kliesen said the 1990-91 recovery was unique because it was the first post-World War II episode without a surge in employment and in output. He noted that some economists attribute this to the following factors:

• Over-building in the commercial real estate sector in the 1980s. Usually, the construction sector contributes significantly to economic recoveries. The last two times, however, it dragged the economy down.
• A slower rate of government spending, because of defense cutbacks after the end of the Cold War, the Budget Enforcement Act of 1990, and large fiscal imbalances at the state and local levels.
• Excessive levels of debt accumulated by businesses and households meant reduced rates of consumption and investment to service that debt.
  

Kliesen also pointed out, however, that the 2001-03 recovery was marked by key differences as well:

• The growth of real business fixed investment remained negative between the end of the 2001 recession and the first quarter of 2003.
• A weak stock market, which in turn exacerbated the decline in business investment, because falling stock prices meant that firms were less willing to issue stock to finance capital expenditures.
• The terrorist attacks of 9/11 and the wars in Afghanistan and Iraq heightened uncertainty among consumers, businesses and investors, as did the corporate governance scandals. The latter, Kliesen noted, also may have caused businesses to postpone new investment projects and expand their payrolls.

Kliesen also weighed the evidence which suggests that some fundamental changes are occurring in the way firms compete for, and use, workers. For example, one study observed that companies are increasingly adopting "just-in-time" workforce practices, such as hiring workers through temporary employment firms, using part-time workers and adjusting overtime.

Another argument is that improvements in production technologies and other management practices have allowed firms to produce the same output with less workers.

An additional piece of evidence is the percentage of the unemployed who are classified as "permanent" layoffs. "During the past three recoveries, the percentage of those classified as permanently unemployed has risen to about 43 percent," said Kliesen, "much higher than the roughly 33 to 36 percent seen after the 1970-71 and 1973-75 recessions."

Kliesen said that in the seven post-war recoveries prior to the early 1990s, gains in labor productivity and hours worked contributed about equally to the gain in economic growth. In the past two recoveries, however, hours worked have declined, meaning that all the gain in output has stemmed from labor productivity growth. Therefore, the recent rapid productivity growth has made it unnecessary for firms to expand their payrolls to the extent they usually do during an economic recovery. Nevertheless, Kliesen concluded that "higher productivity growth eventually means higher income, higher spending and increased employment."

The Regional Economist is also available on the Bank's web site: www.stlouisfed.org.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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