Job Losses Suggest Economy is in Recession
This paper attempts to show that while it is correct to assume that job losses and the resultant rise in unemployment rate, historically and theoretically, accompanies recession, the same could not be used to assume that indeed it is going to occur. This paper adopts the following definition of job loss and recession. OECD (2002) defines job loss as the “disappearance of jobs because of structural economic changes… including technological innovation, changes in the pattern of international trade, shifts in the location of activities, and changes in the structure of employment and organization within enterprises”.
Hall, Feldstein, Frankel, Gordon, Romer, & Zarnowitz of the Natio...
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...nal Bureau of Economic Research (2003) defines recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.
” Positions Job loss is not the only element of unemployment because unemployment occurs even without any significant job loss. This happens when the supply of labor exceeds demand—when there is no sufficient economic activity to absorb optimally the available labor force. Continued increase in unemployment rate could be seen with the growth of the labor force due to entries from segments of young population that had matured to join the labor force while, at the same time, the attrition from the employed segment of the labor force is very low.
There need not even be a recession for any increase in unemployment rate to occur because the economy can actually be growing albeit not fast enough to absorb the influx of employable people in the labor force. However, when economic activity slows down significantly, and is unable to absorb even the segment of the labor force currently employed, companies will start laying off people as part of their cost-cutting measures, and hence, jobs will be lost. Theoretically, an increase in unemployment rate resulting from significant job losses accompanies recession. Historical data supports this theory.
Figure 1 shows that the peaks of United States (US) unemployment rates are in consonance with the downward trend of its real gross domestic product (GDP) growth rates. Figure 1. US real GDP growth rates and US unemployment rates, 1980 – 2008, raw data from World Economic Outlook Database October 2007. From 1980 to 2008, unemployment rates peaked three times in 1982, 1992, and 2003, and all were associated with recessions. The recession of the early 1980’s was the worst as the US economy had experienced two succeeding oil crises in 1973 and 1979. In 1982, real GDP growth rate dropped to its lowest level of -1.
9% while unemployment rate reached its highest level of 9. 7% during the period. As the economy began to grow in 1983, real GDP hit the highest growth rate of 7. 2% in 1984. In the same manner, unemployment rate is reversing its trend towards a lower rate of 5. 3% in 1989. Again, the economy was in recession by 1990-1991 when GDP growth rate was at -0. 2%. Again, unemployment rate peaked at 7. 5% only by 1992 just about the time when the economy was beginning to recover. But the economic expansion of the 1990’s brought a long-run downward unemployment trend reaching the lowest rate of 4% in 2000.
According to Katz and Krueger, this downward trend can be explained by four labor market factors: (1) the entry of the oldest baby boom cohorts in the labor force at age 16 in the 1990s; (2) a rise in the proportion of the population in prison for the same period; (3) introduction of improvements in the labor market resulting to better matching between workers and jobs, foremost of which is the Worker Profile and Reemployment Services program required in each state and the temporary help service industry; and (4) worker insecurity in demanding wage gains as union membership steadily declined.
After improving GDP performance from 1992 to 2000, the economy was in recession by 2001 when the real GDP growth rate was only 0. 8 %. This recession was not as severe as in early 1980’s or early 1990s as the unemployment rate peaked in 2003 at 6%, the lowest peak during the period. With the slow recovery of the economy, the unemployment rate continued to increase. Thereafter, the unemployment rate had slowly decreased to 4. 7% in 2007 while real GDP growth rate stood at 1. 9%. In 2008, the unemployment rate started to increase to 5. 7% while the real GDP growth rate maintained a steady rate of 1. 9%.
Clearly, historical data reveals that recession is always accompanied by a resultant unemployment. As economic activity slows down, unemployment increases and for the most part this results from job loses. However, the historical data also shows that unemployment peaks at some time after the recession had begun and even extends up to the time the economy starts to recover. It is, therefore, a lagged indicator to recession. Its direction remains steady and changes only a few quarters after the economy had changed its own direction. It is suggestive of recession, but it cannot forecast whether recession will likely to occur or not.
A market update by the Associated Press in January 13, 2008 reports that the economy is headed to a recession before the end of this year; its forecast is based on other factors that the “unemployment rate’s leap to a two year high…. ” Using the movement of the unemployment rate to forecast the rise and fall of the economy seems to be weak, as historical data of unemployment rate has not shown it as a leading indicator of recession, but a lagged indicator. The historical data shows that during the recessions in 1981-1982, 1990-1991, and 2001, unemployment rates peaked at least a year after the recession has already occurred.
The same article cites that “such is the fallout from a housing meltdown that threatens to slingshot the country into a recession” (Associated Press, 2008). The possibility of a recession gleaned from housing market performance data is more viable because a slowdown in the housing market during periods of very brisk economic activity can often mean that the a recession is forthcoming, and increased activity in the same market during recession often spells that better times are just around the corner.
Of greater predictive value are data from the stock market, because investors are always on the lookout for movements in the macroeconomic variables to determine when the economy will move upward or downward. Based on such determination, they usually sell off their shares before any decline in the economy. Better forecasting of any movement in the economy, whether it be towards recession or expansion, depends on the ability to determine the amount of business activities in an economy by a careful study of several factors, such as industrial production, real income, wholesale-retail sales and in combination with employment, among others.
One factor alone—the increase in unemployment rate resulting from job loses, cannot suffice. Having discussed the relationship between job loses, or unemployment rate and recession; and having defined the manner with which job loses can suggest recession, the real problem from my view is the definition of recession. The definition provided by Hall, et al (2003) had been justifiably subject to assault because it was ambiguous to a point that it becomes useless.
Some are inclined to a definition of recession that means “a situation in which a country’s GDP sustains a negative growth factor for at least two consecutive quarters” and setting the negative growth at a “GDP of less than 2% growth rate”, with the tacit admission that “recession can be defined differently by different economists” (My Stock Market Power [MSMP], 2008). However, Moffat (2008) picks on this definition noting that this definition is not popular with most economists for two reasons.
“First, it does not take into consideration changes in other variables as this definition ignores any changes in the unemployment rate or consumer confidence. Second, by using quarterly data, this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected” (Moffat, 2008). Again, the position of this paper reiterates that of Moffat’s, where recession must be reckoned from an aggregate of factors and not one alone.
If we adopt MSMP’s definition, the objections of Moffat (2008) notwithstanding, then technically, US is not in recession having posted a 1. 9% real GDP growth rate in both 2007 and early 2008. To be true to the position of this paper, the analysis of the status of the economy as not yet in recession should be seen in the context of the 22,000 jobs lost in January of this year and the 63,000 jobs lost in February. Conclusion In any discussion of recession, it is understandable why often too much significance is attributed to unemployment and more especially to job loss.
The reason for this is that, this is where recession is felt most at its worst for everybody whether they be employers, or employees, or government. For a worker, nothing can be more demeaning than the specter of losing one’s job, and nothing more harrowing than failing to provide for one’s family. For an employer, there is nothing more problematic than keeping the workers on the payroll, or what to do with them and the associated costs when the business has to close down.
For the government, unemployment can brew a social unrest, demand social security reforms, and require labor market improvements. However, understanding forecasting and finding solutions to recession, neither begins nor ends with unemployment and job loss. A fix to unemployment comes only after the other factors and causes of recession had been addressed.
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