Bryan Caplan  

Why Is Employment Becoming a Lagging Indicator?

AS vs. PSST, again... For Discussion...
Tyler's impressed that spending and output are up, but employment isn't.  But the simplest story is just that employment is becoming a lagging indicator.*  Consider: After the last "jobless recovery," the unemployment rate still fell to 4.9% by the end of 2005. 

It seems a lot more helpful to explore why the lag between output and employment is increasing instead of speculating that 5% of the labor force has mysteriously become useless.  Your stories?

* If it wasn't already.  Wikipedia names unemployment as a "coincident indicator" but also says "The unemployment rate is a lagging indicator: employment tends to increase two or three quarters after an upturn in the general economy."  Roubini said employment and unemployment were lagging indicators back in January of 2007.

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COMMENTS (4 to date)
volatility bounded writes:

The disconnect between gdp and the financial markets versus employment and small business activity and sentiment is because they are measuring different parts of the economy.

The equities and debt of the exchange traded debt and equities of companies were all lifted by liquidity provided by the Fed and other central banks. However, individuals and small businesses can't raise money in the financial markets; they have to borrow from banks. Banks haven't been lending much to individuals and small businesses, as opposed to re-building their capital by investing in treasuries and sovereign debt and other exchange traded instruments.

Where the multinationals have been hiring, a lot of it has been to hire to expand production in low-cost geographies, not in the developed world. Small business in the US drive their hiring by demand in the US, and there isn't much because US households are seeing reduced income due to Bernanke's low interest rates, and wage reductions due to competition from offshore workers, and balance sheets too weak to borrow much. Consumer demand in the US looks punk once you adjust it for population growth, and exclude the wealthiest 1% or 5%.

Noah Yetter writes:

It seems a lot more helpful to explore why the lag between output and employment is increasing instead of speculating that 5% of the labor force has mysteriously become useless.

No, because Tyler's ZMP story fits the facts better than "oh it's just a lagging indicator". Statistics don't have lives of their own, they move because their constituent observations move. The unemployment rate is not, has never been, and will never be simply a function of GDP and time. ZMP can't explain all of it but as Tyler recently posted in answer to Sumner and Krugman, it can explain some of it, and that counts for a lot.

It's also not "mysterious" why these workers are no longer employable. If that's really your impression of this theory you need to go read all the posts again.

Randall Parker writes:

I see employers pushing their workers to work more because, hey, look at that high unemployment rate. It is rough out there. Better work hard to make the business successful if you want to avoid a long spell of unemployment.

In other words, employers think they have the upper hand and can squeeze workers harder.

Of course, this begs the question of why employers aren't making so much money off their smaller workforces that they want to expand to make even more money. But the average next hire will be less productive and even have less potential than the people already working - at least in tech jobs. I see a strong desire to outsource and get even lower labor costs.

Joe Cushing writes:

I didn't know it was becoming a lagging indicator. I just thought it was one.

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