Last week Nobel Prize winning economist Paul Krugman wrote “The best hypothesis about the US economy this past year and more is that it has been steadily adding jobs at a pace roughly fast enough to keep up with but not get ahead of population growth.” Professor Krugman is correct. Total employment in the U.S. stopped its recessionary decline in February of 2010, whether measured using the Bureau of Labor Statistics (BLS) household or establishment payroll surveys. In the two and a half years since then the economy has steadily gained enough jobs to just keep pace with population growth and demographic changes. This would be good news if starting from a position of full employment. But starting from a labor market trough, after the worst recession since the Great Depression, the job market performance over the past 30 months is best described as treading water. We can be relieved that employment did not fall even more, but what we have seen for the past 30 months is an extremely weak labor market recovery.
The labor market situation must be dismal when even one of President Obama’s strongest critics on economic policy, Jim Pethokoukis of the American Enterprise Institute, has understated the weakness of this jobs recovery. In a recent post Pethokoukis observed that, according to BLS establishment payroll data, the “Bush jobs recovery” created 5 million private sector jobs while the “Obama jobs recovery” created 4.6 million private sector jobs. Although true, that is only part of the story.
Pethokoukis didn’t raise two important issues. First, in the “Bush jobs recovery” household employment grew more rapidly than payroll employment. Economists can’t provide an exact accounting of the differences between the two employment series, but much of the difference is due to new start-ups, small businesses and the self-employed. Small businesses and the self-employed are either underrepresented or missed entirely in payroll employment totals and births of establishments are very difficult to track. However, it is clear that many people were starting their own businesses or taking jobs with small businesses in the “Bush jobs recovery.”
A focus on payroll employment also ignores the difference between part-time and full-time work. In addition to the millions of jobs lost in the recession, millions more moved from full-time to part-time work. For the labor market to fully recover, underemployed workers in part-time jobs must find full-time work. Consider a comparison of gains in full-time jobs during the two most recent recoveries. The “Bush jobs recovery” began in August 2003 while the “Obama jobs recovery” began in February 2010. The comparison is over a 30 month periods because the most recent data available are from August 2012. The “Bush jobs recovery” created about 5.59 million full-time jobs in 30 months compared to 3.51 million in the “Obama jobs recovery.” The 2003 -2006 recovery was not as robust as previous recoveries but still produced two million (59%) more full-time jobs in 30 months than have been created since February 2010.
Welch Consulting has developed an employment index based on the BLS household survey that accounts for differences between full-time and part-time work, as well as the changing age and gender distribution of the workforce, population changes, and seasonal effects. The index has moved up and down since February 2010 but is imperceptibly different from 30 months ago. No change in the Welch Index means the economy created full-time equivalent jobs at the same rate as population growth. In contrast the Welch Index steadily increased from 2003 to 2006.
A side-by-side comparison of the two recoveries is easier if one compares percentage changes in the index relative to the employment trough (beginning of each jobs recovery). The following chart shows that after 25 months the Welch Index gained 2.3% in the “Bush jobs recovery” compared to 1.8% in the “Obama jobs recovery.” Just five months ago the difference in the two recoveries was modest. In the past five months nearly all of the gains in full-time equivalent employment (relative to a growing population) have been lost. The full-time equivalent employment to population ratio is no better than it was in February 2010, at the end of a deep and prolonged recession. In contrast in the “Bush jobs recovery” full-time equivalent employment growth was accelerating and grew much faster than the adult population over the corresponding time period (September 2005 to February 2006). By 30 months into the recovery the index had grown over 3%.
Recognizing that President Obama inherited an economic mess, the amount of job creation on his watch has been disappointing. What looked promising in early spring 2012 has stalled and the hope for a “recovery summer” faded long ago. The job creation record under President George Bush’s leadership was not only better at this stage in the recovery, it was improving.
Any President has a limited impact on the rate of job creation. Economists may disagree about the magnitude of the effect of tax policy uncertainty on job creation, but none would advocate a system where businesses large and small are uncertain of tax rates just four months in the future. Tax policy is, however, the responsibility of both the President and Congress. The President has a much greater impact on the regulatory landscape through the executive branch. Labor market regulations, such as those in the Fair Labor Standards Act, can also discourage hiring (and encourage outsourcing). It is difficult to tell, at this time, how much the Obama Administration’s expansion of regulations has had a chilling effect on hiring.
The Obama campaign will remind us that in early 2009, for about six months, the economy was losing 700,000 to 800,000 jobs per month. The more pressing issue, however, is which candidate has better policies to help employment grow relative to our population over the next decade. Some policies require bipartisan cooperation in a divided Congress. Other regulatory reforms are more directly under the control of the executive branch. Let’s hope the Presidential debates challenge the candidates to describe regulatory reforms that will reduce the headwinds and even help foster job creation in the U.S.