Snapshot for August 27, 2003.

Weak demand constrains job growth

Many commentators have argued that the biggest obstacle to job growth in this recovery period is the fact that productivity is growing quickly. In reality, it is weak demand by consumers and investors—not a rapid growth in productivity—that is holding back job growth. The fact that our workforce is producing more efficiently now than it was a few years ago does mean that the U.S. workforce can create the same amount of output in fewer hours, but that is a positive development that should lead to higher living standards than would otherwise be the case.

The figure below shows that productivity growth in the recovery has been only slightly (0.3%) above the average of that of the past eight expansions. Employment growth, on the other hand, has been much stronger in past recoveries (3.3% versus -0.5%). Productivity often accelerates as an expansion gets underway, as output growth is typically faster than growth in hours, and employers slowly expand their workforce to meet the return of demand for their firms’ goods and services. But in this recovery (and in the last), demand has been too weak, outside of a few sectors, such as health care, housing, and autos, to prompt employers to begin hiring.

As the last set of bars in the figure shows, demand (output in the nonfarm sector) grew more than twice as fast in past expansions compared to this one. In the current expansion period, consumers have not been spending as aggressively as they usually do after a recession, which in turn has made investors more cautious. This vicious cycle is reinforced by high debt levels. The result is historically weak hiring in the current jobless recovery period.

This week’s snapshot was written by EPI economist Jared Bernstein.

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