When Job Growth Starts Again

With most people still debating when and whether the recession has landed, it may be too early to talk about an economic rebound. But when it does happen, there's a good chance the phrase "jobless recovery" will reenter the lexicon.

First coined following the 1990-91 recession, jobless recoveries refer to the fact that after the last two downturns it took a number of months before businesses increased hiring -- and when they did, it was seen as anemic:

But the reason for this tepid job growth comes from what economists have seen as a positive development, explains Philly Fed economist R. Jason Faberman.

Since the mid-1980's, volatility in economic activity has declined dramatically. This decline has been dubbed the Great Moderation:

(hat tip for chart: Justin Wolfers)

In this 2004 speech, Fed Chairman Ben Bernanke explains why the Great Moderation was a good thing:

Lower volatility of inflation improves market functioning, makes economic planning easier, and reduces the resources devoted to hedging inflation risks. Lower volatility of output tends to imply...a reduction in the extent of economic uncertainty confronting households and firms. The reduction in the volatility of output is also closely associated with the fact that recessions have become less frequent and less severe.

What Faberman points out is that less volatility in the overall economy likely means less volatility in the job market as well. The following chart shows job creation and destruction rates for the manufacturing sector since 1947:

It's clear that there's been a steady decline in both rates since the 1960's. While this data is only for manufacturing, Faberman believes it apples to other sectors as well, and what it reveals is that unlike GDP activity, the Great Moderation in job market flows has been happening for a long time.

Still, the Great Moderation isn't the only reason for jobless recoveries. The way employers hire and fire people has also changed over the past couple of decades. The following chart shows unemployment rates by reason. Since 1982, the percentage of people who say they are unemployed because of a temporary layoff has dropped sharply and remained quite stable:

Looking at the current job situation, that stability hasn't changed. While there's been an uptick in the number of people who report being out of work because of a permanent layoff, those who say they're jobless because of a temporary layoff has remained flat. This implies that when employers do start to hire again, job growth could look very weak.

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