America’s meteoric recovery could hold lessons for future recessions
A COMMITTEE OF eight eminent economists formalized it on July 19. The covid-19 recession, the deepest in the United States since the Depression, was also the shortest, covering only March and April 2020. This tests the very definition of a recession, which the National Bureau of Economic Research described as “a significant drop in economic activity that is spread throughout the economy and lasts more than a few months”. A recession that was nevertheless judged, given its magnitude and extraordinary depth. The fall in production in the second quarter of 2020 was more than three times the second-largest quarterly decline in post-war American history.
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The rebound in GDP, fortunately, was just as dramatic. The annualized growth rate of 33.8% recorded in the third quarter of 2020 was about twice as fast as the second best quarterly performance of the post-war period. As the Bureau of Economic Analysis reported on July 29, production exceeded its pre-pandemic level in the second quarter of this year. While unique in some ways, this ongoing revival resembles past revivals in other important ways. This may turn out to be similar enough to help economists better understand what policy can achieve in the face of difficulties.
Recent US recoveries have tended to be â€œjobless,â€ meaning that labor markets have taken much longer to regain lost ground than aggregate output. During the seven recessions from 1948 to 1980, it took on average about five quarters to GDP exceed its previous peak. Employment took only a little longer to recover: six quarters on average. From the 1980s, however, the recovery in employment began to lag behind that in production. In the four downturns leading up to the covid-19 crisis, GDP returned to its peak in just six quarters, on average. But employment has not surpassed its previous peak for 15 full quarters.
It is not entirely fair, of course, to call today’s recovery jobless. Around 22 million jobs were lost between February and April 2020, and 15.6 million have since been added. (The July payroll figures were due to be released on August 6, after The Economist went to press.) Yet hiring is once again lagging behind GDP. Although production hit a new high in the second quarter, employment remained more than 4% below its pre-pandemic level. Moreover, the resulting jump in the level of output per worker during this recovery appears remarkably similar to that following the global financial crisis (see chart). America is now producing more production than it handled just a year and a half ago, with about 7 million fewer workers.
This seems to indicate that productivity has jumped across the economy. It may be well done. The pandemic has forced many companies to experiment with new technologies and new ways of working and has favored some business models over others. The effect on output per worker in some sectors has been dramatic: Labor productivity in retail has jumped nearly 8% in 2020, for example. The increase in output per worker also reflects the changing composition of the workforce. Employment in the leisure and hospitality industries, where productivity tends to be low, remains about 13% below pre-pandemic levels, compared with a deficit of 4% in the higher productivity manufacturing sector .
That productivity-boosting restructuring can accompany a period of economic stress is hardly surprising. In work published in 2012, for example, Nir Jaimovich of the University of Zurich and Henry Siu of the University of British Columbia analyzed the destruction of â€œroutineâ€ jobs – jobs that follow simple procedures and are therefore very likely to be automated or outsourced – and finds its impact concentrated around recessions. In addition, the researchers noted, the destruction of routine labor during recessions appears to be the source of much of the unemployment in economic recoveries since the mid-1980s. But output per worker has ultimately stagnated over the course of time. of these laborious recoveries, perhaps because low-paid service work has grown only slowly to absorb the persistent pool of unemployed labor.
The current recovery could reveal whether a more aggressive policy response can produce a different result. Contrary to past recoveries, this one was positively dazzling, thanks to an explosion in deficit spending matched only by that of the Second World War. In the first four quarters of the recovery, production increased by just over 12%. Rapid growth is expected to continue; the IMF, for example, projects that GDP will increase by 7% in 2021 as a whole, and an additional 5% in 2022.
How might the future trajectory of jobs and productivity change as a result? One of the scenarios is that, fueled by stimulus measures, economic expansion remains rapid, but the initial productivity gains are not preserved. Consumer demand would shift towards labor-intensive services, leading to frantic hiring. The result would be a recovery rich in jobs, but poor in productivity. If the economy were to grow as planned by the IMF and output per worker falls back to pre-pandemic levels, then employment would increase to 166 million by the end of 2022, from 146 million today. That would mean there were around 14 million more jobs than in February 2020, when the unemployment rate stood at 3.5%.
Another possibility looms, however. Perhaps the growth of expanding, high-productivity industries, which can afford to pay higher wages, will continue, leaving fewer people willing to take on low-productivity, low-wage jobs in the service sector. . Where past jobless recoveries might have encouraged the creation of low-wage service jobs, faster expansion today could sever the tie, perhaps forcing employers in those industries to automate instead. America would benefit from a job-rich recovery while emerging from the structurally altered pandemic, with a permanent increase in its level of productivity.
Wishful thinking, perhaps. But whatever the outcome, US spending will have bought a faster recovery and new information on how best to ease the pain of a recession. And it may well have gained in productivity. â–
This article appeared in the Finance and Economics section of the print edition under the title “Something ventured”