Four Years Into Recovery, Austerity’s Toll is At Least 3 Million Jobs

The official start of the recovery from the Great Recession began in June 2009. This coming Friday will mark the release of employment data for June 2013, allowing us to assess how this recovery stacks up against earlier recoveries 4 years in, as well as letting us diagnose obvious areas of economic weakness in the current recovery.

The figure below (also here) compares the current recovery to the three prior recoveries. Recessions are marked by the lines to the left of the zero point on the x-axis, while recoveries are to the right. The figure shows that job growth in the current recovery is slightly stronger than the job growth following the recession of 2001. However, it is slower than in the prior two recoveries and is in fact slower than in any other previous recovery dating back to World War II. Furthermore, jobs fell much further and faster during the Great Recession than in any other recession over that period, meaning that we are stuck in a much larger jobs-hole four years into recovery than in any previous business cycle. The fact that four years into the recovery we still have not yet come close to making up the jobs lost in the downturn, (much less the jobs needed to keep up with growth in the potential workforce over that time), is a grimmer situation than anything our labor market has seen in seven decades.

 figure1

The current recovery’s most glaring weaknesses relative to previous ones is the unprecedented drag on economic activity and job-growth imposed by cuts in public spending (ie, austerity). The figure below (also here) compares public sector job growth in the current recovery to that of prior recoveries, showing that the public sector has seen massive job loss in the current recovery, a huge drag that was not weighing on earlier recoveries.

figure2

How many more jobs would we have if cuts to the public sector hadn’t been so steep since the recovery began? We know that the public sector has shed 737,000 jobs since June 2009. However, this raw job-loss figure radically understates the drag of public-sector employment relative to how this sector has normally performed during economic recoveries, for a number of reasons.

First, public-sector employment should naturally grow as the overall population grows. Between 1989 and 2007, for example, the ratio of public employment to overall population was remarkably stable at roughly 7.3 public sector workers for each 100 members of the population. Today’s ratio is 6.9, and if it stood at the historic average of 7.3 instead, we would have 1.3 million more public sector jobs today. Second, much government spending does not necessarily directly employ public sector workers. Instead, it may support private sector jobs—either through contracting or through the need of public employees to have supplies to do their jobs (privately-produced automobiles to supply police officers, for example). Finally, government transfers to persons (unemployment insurance, Medicaid, Social Security) support economic activity without directly employing either public employees or even directly supplying private-sector workers. But, it is clearly the case that food stamps and unemployment insurance allow American families that have been hit by hard times to maintain spending on food and clothing and rent to a much greater degree than they would have otherwise, and this keeps workers employed in grocery stores and retail shops and keeps landlords’ incomes more stable.

The table below  [update: The "additional jobs" estimates for the 1981 and 2001 recoveries were flipped in the first version of this - table below is corrected] provides a range of statistics comparing public spending across the past four recoveries, and then translates this public spending into increased employment. The first row in the table provides the vital economic context to what follows—the size of the output gap (as measured by the Congressional Budget Office) at each recession’s official trough. This is simply a measure of how deeply depressed the economy was as recovery began. At the trough of the recession that began in 1981, output was 8.1 percent below potential. At the trough of the 2001 recession, on the other hand, output was just 0.7 percent below potential at the trough. The output gap at the trough of the Great Recession was much closer to the 1981 gap—7.4 percent.

The next row displays the cumulative change in public spending over the economic recovery. The current recovery severely lags the average of previous ones in cumulative public spending growth, 11.3 percent to -1.0 percent. The next row translates this into current dollars, showing that if the current recovery had seen public spending just match the weakest growth in the previous 3 recoveries (following the 2001 recession), this spending would have been $399 billion higher in the first quarter of 2013. Matching the strongest growth in public spending in the previous three recoveries (that following the recession that began in 1981) would translate into public spending that was $985 billion higher in the first quarter of 2013.

The next row translates this extra public spending into additional employment that would have been spurred by this extra public spending, assuming a conservative economic “multiplier” of just 1.25.1 Even the weakest public spending in the previous 3 recoveries would have seen 3 million more jobs in the first quarter of 2013 had it been matched in the current recovery. The strongest public spending in the previous 3 recoveries (that following the recession that began in 1981) would have resulted in 7.4 million more jobs in the first quarter of 2013.

 

table for blog

 

We have previously estimated that the economy needs 8.5 million jobs to return to pre-recession labor market health. This implies that about 35 percent (3 million at the low end) to 87 percent (7.4 million at the high end) of the current “jobs gap” can implicitly be seen as simply arising from the failure to provide the same public spending boost given to earlier recoveries. This is an important lesson. Calls to address the jobs-crisis with a fiscal boost commensurate to the scale of the problem are often greeted by implicit claims that this would constitute a wild and historically unprecedented degree of public spending. It’s not so—we’ve had this amount of fiscal support for recoveries before, in the not-so-recent past. There is nothing either economically or historically “unrealistic” about the prospects of ending the jobs-crisis by ending austerity. The most concrete near-term step to take in undoing this austerity is to undo the federal “sequester” that is just beginning to significantly affect GDP and job-growth.



1. It should be noted that most estimates of the economic multiplier of deficit-financed direct government spending, as well as most public transfers, is substantially higher than this during periods of large output gaps and when the Federal Reserve is likely to be purely accommodative of increases in public debt – a very safe assumption currently. See Bivens (2011) for a survey of some of these multipliers and how to translate additional economic activity spurred by increased government spending into an estimate of additional jobs.


  • benleet

    Between 1939 and 1944 employment increased from 45.8 million to 65 million, a 42% increase that followed federal government spending “increase from $22.8 billion in 1939 to $269.7 billion in 1944. This increase is virtually identical to the overall increase in real GNP [which increased from $319.8 billion . . . in 1939 . . . to a peak of $561.9 billion (in 1972 dollars) in 1944.” I quote from Samuel Rosenberg’s American Economic Development Since 1945, page 20. Unemployment in 1939 was about the same as today’s, and then shrank to below 2% for a couple of years, 1943 and 1944. Where there is a will there is a way.