V To L: A Simple, Interesting, and Important Picture

February 6th, 2012 at 2:31 pm

If you’re an observer of business cycle patterns, and who isn’t, this isn’t news to you.  But you still might find this to be a useful picture of the phenomenon of moving from V to L.

It’s simply employment as a share of the population–so-called employment rates for people at least 16 years old, considered a good proxy for labor demand.  As you can see, it’s highly cyclical.  But it provides a useful picture of the changing nature of recessions and recoveries, or the morphing from V, through U, to L.   

Source: BLS

The first three cycles show your grandfather’s recession—there’s some demand shock, a bunch of guys get furloughed from the factory, there’s a correction, they get called back to work, and boom—there’s your V.

The next two cycles are stretched out a bit more—these are the U’s.  They were “jobless recoveries”—I know, how can you have a recovery without jobs?—good question.  Globalization, the loss of manufacturing jobs, milder demand shocks, the increased use of temp workers, more of a just-in-time inventory approach to staffing, were some of the main factors which gave these recoveries their protracted shapes.

Next, the dreaded L, with which we’re currently living.  Clearly, the downturn was the deepest in the picture, and was thus beset by the interaction of this depth along with all the U factors just noted.  Add in the wealth effects of the housing bust, the financial bust, the credit crunch, and fading stimulus and you get the picture.

Recent job gains haven’t much moved the L to more of a U, suggesting employment growth is trending at about the growth rate of the adult population. 

Such portentous shifts in macro trends deserve more than a blog post, but for now, V through U to L serves as a useful summary.

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15 comments in reply to "V To L: A Simple, Interesting, and Important Picture"

  1. Edmundo says:

    Lump of labor on a global scale?

    So how do we account for unneeded capacity?

    a) unneeded work – more advertizing, more daytime television, digging holes to fill, unreliable shorter life products?

    b) unemployment – benefit and tax?

    c) More leisure meaning a bigger market for leisure activities?

    If it is lump of labor on a global scale, and we continue to seek the advantage of investment, it is only going to become more of an issue, so we are better off avoiding stop-gap solutions..

    Is a) b) or c) the solution most likely to succeed and lead to a stable society?

  2. Stealth says:

    Do you think the rise in the ratio above 60% was sustainable? If not, that would explain the L.

    • cat says:

      It could be the effective tax rate on Corporations, the effective taxrate on incomes over 250k, the Employment rates of Country X, or sunspot output…

      There are many hidden variables for the f() called Employment Rate in that chart to try and use it for prognostication even though its a great graph for illustration.

    • Truth Will Out says:

      My thoughts exactly. What represents the “right” level of population employed. Clearly there are some of us too young, too old, too sick to work. Some of us will find homemaking to be more beneficial than the marginal increase in income. Was the rise into the 60 -65% range an aberration? Does the return to 58% reflect a return to more sustainable employment rates?

  3. Tom says:

    I would guess that the rise of the ratio above 60% was largely due to increasing participation of women in the labor force. Except for the 91 recession, it stayed above 60% for twenty years. That smells an awful lot like ‘sustainable’.

    In ‘Political Aspects of Full Employment’, Kalecki wrote the following:

    “In current discussions of these problems there emerges time and again the conception of counteracting the slump by stimulating private investment. This may be done by lowering the rate of interest, by the reduction of income tax, or by subsidizing private investment directly in this or another form. That such a scheme should be attractive to business is not surprising. The entrepreneur remains the medium through which the intervention is conducted. If he does not feel confidence in the political situation, he will not be bribed into investment. And the intervention does not involve the government either in ‘playing with’ (public) investment or ‘wasting money’ on subsidizing consumption.

    It may be shown, however, that the stimulation of private investment does not provide an adequate method for preventing mass unemployment. There are two alternatives to be considered here. (i) The rate of interest or income tax (or both) is reduced sharply in the slump and increased in the boom. In this case, both the period and the amplitude of the business cycle will be reduced, but employment not only in the slump but even in the boom may be far from full, i.e. the average unemployment may be considerable, although its fluctuations will be less marked. (ii) The rate of interest or income tax is reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. “

  4. Steve Goldstraw says:

    If that rate of job creation the last 23 months continues, we will have enough jobs for our growing population and recover all the 8,779,000 jobs lost during the 25 months from Feb 2008 thru Feb 2010

    BY Feb 2028 in 16 more years

    • Phil says:

      However, job growth is likely to accelerate. That is what happens once job growth kicks in. In tends to create a snowball effect.

      By the way your numbers are bit suspect.

      According to the Bureau of Labor Stats:

      Total employed (seasonally adjusted)
      January 2012: 141,637,000
      January 2011: 139,330,000
      January 2010: 138,500,000
      January 2009: 142,187,000
      January 2008: 146,397,000
      January 2007: 146,028,000

      We are 4,760,000 jobs short of where we were in 2008, but have added back 3,236,000 employed from the 138,401,000 low we hit in October 2009.

      We have already gotten a fair way back. Even adding in population growth and netting out retirees we are much further along and will get to pre-recession levels much quicker than you are saying.

      In fact, the job recovery in this recovery has actually been better than in the 2001 recession.



  5. the buckaroo says:

    …seems the dynamics of supply, demand & the marginal utility of money has failed. Let’s take gasoline. The marginal utility of money increases as prices rise, i.e., it has greater utility when there is less of it. Is it at this stage that the consumer surplus effect confounds the likes of Hicks?

    If the amount of money withdrawn from the surplus tends to shrink prices, then what the chuck is the explanation of current prices of petrol & the futures trades?

  6. Red Planet says:

    It would appear that what is missing this time is a bubble. We had the false wealth effect of Dot-Com. Followed by the false wealth effect of Housing. Followed now by … cold, dead silence.

    America has exported its middle class to the Pacific Rim, cleverly supporting domestic consumption with bubbles.

    My oh my, what new bubble may be lurking over the horizon to save us?

    I don’t see one.

    Do you?

  7. Phil says:

    I am not sure why everyone is getting the particpation rate wrong.

    This time is different.

    In 2006/2007 the baby-boomers first started to retire en mass, as that is when they first started reaching retirement age. The Social Security Adminstration reports 6 million more retireees since 2007. There is no way enough 16 years are entering the labor force to make-up for the recent phonenomen of massive retirment.

    So, the particpation rate has been dropping naturally.

    Just look at the chart shown above. It peaked in 2000 and has been all downhill since then. Sure there is a slight downtick in the particpation rate because of the recession, but not much and the trend down has been with us well before the recession.

    Also, if you look at the prime age worker participation rate “24 yrs old to 54 years old” it has barely moved. The prime age participation rate negates much of the demographic influence.

    Why is no one talking in any meaningful way about the impact on massive baby-boomer retirements on the particpation rate in recent years? or mentioning that the trend has been down since 2000 and the current particpation rate is just largely following the pre-recession trend?

    It is not really that people have been disgruntled and are dropping out of the labor force, so the unemployment rate is really higher. It is that a lot of people have been retiring.

  8. Fred Donaldson says:

    Australia minimum wage is $15. Paying people decent wages, instead of food stamps, puts the burden on the sheep herders, not the sheep.

    • Chigliakus says:

      Where is this $15 minimum wage magic number coming from? I’ve been hearing it brought up a lot lately, mainly as a panacea for inequality when debating politics with conservatives.

  9. V Recessions, U Recessions, and L Recessions « An Occupied Blog by Steve Demetriou says:

    […] Jared Bernstein does a nice job showing the relative recovery dynamics of several recessions suffered in the US since June of 1969. As he briefly explains the role of business cycles on his blog, and with a great graphic showing employment as a share of population (from the Bureau of Labor Statistics), recoveries take form based on how quickly employment numbers rebound. V recessions hit bottom with recovery in jobs showing a relatively quick rebound. Re-hires or easier mobility between jobs tend to work to the benefit of the unemployed here after the initial storm is weathered and the economic adjustment kicks in. U recessions rebound more slowly, and in the early 90′s and 00′s were viewed as “jobless” recoveries. Not as easily explained, but clear to have been the dynamic for these two recoveries. […]