Labour market woes are likely to loom large in the historical chronicle of the current period. Choose any developed country, and its story reads the same: protracted high unemployment, significant hidden unemployment and underemployment. True, employment is always a lagging indicator of the economic cycle, but today's lags are fast becoming legend. In some cases, unemployment is still rising almost five years after the onset of crisis. Will employment ever turn around, and if so, when?
Unemployment rates usually peak first and plunge fastest in the US. Not this time. Unemployment hit double-digits in October, 2009, and made little significant progress until early 2012. In Europe, Germany stands alone with an unemployment rate that has declined steadily since mid-2009. The UK rate did not peak until November, 2011, and has since only edged down marginally. For the EA-17 as a whole, rates have yet to peak. Then, for each country and region, there are the folks the surveys miss -- discouraged workers who have left the labour force, and the underemployed. Small wonder confidence remains low. Is there any way out?
A key development in economic cycles is the usual catalyst for job recovery: the 'productivity pop'. Typically, output rises, and until they are convinced that it's the real thing, firms and industries delay the hiring process. Instead, they get all they can out of current workers, machinery, buildings and their own ingenuity, and then, as orders swamp these initiatives, they go out and hire. But what they realize in the interval is a significant increase in productivity that is actually an economy-wide event.
This 'productivity pop' has been obvious across countries in the post-recession periods of all recent cycles. This time is a bit different. There was a discernible pop in 2010 in a number of countries, but it ended pretty quickly, and it certainly failed to initiate a strong run of hiring. Why? Well, growth at that time was heavily influenced by public stimulus programs. As such, the job growth was targeted, primarily affecting the parts of the economy touched by stimulus. Second, the stimulus programs were temporary, hardly inspiring permanent hiring. Third, the world economy was plagued by unplanned interruptions, which created additional reticence to hire.
Since that initial flash, productivity growth has been fairly muted, riding the ups and downs of world growth that have been all too frequent in the past three years. As such, we haven't seen a sustained wave of hiring reminiscent of a true recovery period. Rather, public sector austerity has suppressed growth across OECD nations, and the job market remains in 'wait-and-see' mode. Can we expect a productivity pop this time around that will eventually initiate a return to a recovery-wave of hiring?
Low growth is making this elusive, and prospects for a growth surge in Europe, Japan and most of the rest of the OECD are thin. The only anomaly is the US economy. Underlying growth -- that is, economic activity net of public austerity -- is actually clocking in at a recovery-style pace somewhere between 4 and 5 per cent, after accounting for inflation. Given recent hiring numbers, there may well be a productivity pop in the works already, but one that overall numbers are masking. If so, a wave of recovery-style hiring may not be far off -- an event that would be a needed upside surprise for a world still convinced that job markets are going to be very weak for a long time to come.
The bottom line? Hiring -- the bane of the current economic malaise -- needs a signal from the productivity numbers to get going. That may already be in the works in the US. If so, and the effects begin to spread elsewhere, we may be lamenting labour shortages sooner than we now expect.
Suggest a correction