The chairman of the United States Federal Reserve, Ben Bernanke, used a speech to the National Association of Business Economists yesterday to deliver his first comment on the strong employment figures released earlier this month – and he wasn't optimistic.
Despite the fact that employment rose by over 200,000 people in February's figures alone, with yet more being grandfathered in due to revisions of previous month's data, Bernanke warned that there was every chance that what we were seeing was not a recovery, but merely a temporary in what is otherwise still a strongly cyclical depression.
He told the conference :
What we may be seeing now is the flip side of the fear-driven layoffs that occurred during the worst part of the recession, as firms have become sufficiently confident to move their workforces into closer alignment with the expected demand for their products
To the extent that this reversal has been completed, further significant improvements in the unemployment rate will probably require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.
The reason for this note of caution is Bernanke's application of an economic theory known as Okun's law, which says that unemployment and growth should be related. In 2009, unemployment was "too large" for the contraction, and now the growth in employment is "too large" compared to the underlying economic growth. This has lead some to refer to the last few months in the US as a "growthless recovery" (a reference to the fact that recoveries for most of the prior decade ended up being "jobless recoveries", where strong growth wasn't matched by job creation).
Bernanke also quashed two popular alternative explanations for the phenonemenon. The first, that there is perhaps underlying growth which is not being picked up on, was dismissed because other measures of economic activity, such as gross domestic income, show the same thing. In fact, "gross domestic income is currently estimated to have increased less quickly than GDP in 2011 and so does not point to an explanation of the drop in the unemployment rate." [Emphasis in the original]
If growth isn't being underestimated, perhaps job creation could be being overestimated. But Bernanke doesn't buy that, either:
A story centered on potential workers dropping out of the labor force might seem in line with the low level of the labor force participation rate. But other data cast doubt on that idea. For example, a broad measure of labor underutilization that includes people only marginally attached to the labor force has declined about in line with the unemployment rate since late 2010.
There is a silver lining to the pessimism, though. It makes it far more likely that the current depression is cyclical rather than structural, and so the recovery, when it eventually comes, should be relatively pain-free:
This pattern is consistent with cyclical factors accounting for the bulk of the recent increase in long-term unemployment. Similarly, the fact that labor demand appears weak in most industries and locations is suggestive of a general shortfall of aggregate demand rather a worsening mismatch of skills and jobs.
This may be true of the US, but we shall have to wait and see whether the same is true domestically. Attempts to "rebalance" the economy by moving large numbers of workers from the public to the private sector may be the cornerstone of the government's preferred policy of "expansionary fiscal contraction", but if it carries the risk of turning a cyclical slump into a structural one, it should be approached with trepidation indeed.