A Jobless Recovery?

By Jyoti Thottam

The recession--if indeed we had one--appears to have ended in the first quarter, yet unemployment remains stalled at 6%, close to its eight-year high. The economy is growing, but the stock market isn't. The bubble in tech stocks has popped, but some are worried another is swelling in the housing market. It's been that kind of economy, where each hopeful portent comes wrapped in anxiety.

A catchphrase for the times is jobless recovery: national income is rising, but employment is not. That's not unusual immediately after a recession. Businesses are typically quicker to lay off workers than to hire them back. But sometimes, as in the aftermath of the 1990-91 recession, the economy grows for months without a significant boost to payrolls. The statistics say one thing; people killing time in the unemployment line say another.

With 1.8 million net jobs lost in 2001 and little improvement in the unemployment rate so far this year, are we heading toward another spell of cold comfort? That was the question TIME posed to its Board of Economists. "It will feel like a jobless recovery largely because our point of reference is the boom years of the '90s, when unemployment went all the way down to 3.9%," says Nariman Behravesh, chief economist for the consulting firm DRI-WEFA. "When it is up around 6%, it feels a lot worse."

Our four other panelists were Ken Goldstein, labor economist for the Conference Board; Sung Won Sohn, chief economist for Wells Fargo Banks in Minneapolis, Minn.; William Spriggs, director of the National Urban League's Institute of Opportunity and Equality; and Diane Swonk, chief economist for Bank One in Chicago. They all agreed that job growth will remain anemic this year, with unemployment hovering around 5.6% to 5.8% and falling slowly even as other economic indicators regain strength. Our panel expects payroll growth to rise from 50,000 in July to, optimistically, 125,000 by December--compared with 400,000 a month during the 1990s boom.

What makes this economy even more unusual is that productivity has risen through the slump and continues to be strong in the recovery. In every other postwar recession and in the early part of most recoveries, productivity slumped because production dropped faster than employment. This time, companies were quick to shed workers and have been slow to hire them back. Those who have jobs are working harder and more efficiently, with better technology. Productivity, or output per worker, rose 8.3% in the first quarter and 5.5% the quarter before that.

TIME: How significant are productivity gains to the shape of this recovery?

SOHN: I view productivity as the linchpin driving this economy. Economic growth comes from two sources: No. 1 is labor hours; the other is productivity.

BEHRAVESH: One of the unusual things about productivity in this whole cycle is that it continued to rise during the expansion, whereas in the normal cycle, it tends to tail off at the end of the expansion. This time it actually accelerated during the expansion.

SOHN: We don't need as many people to produce widgets, cars, whatever, because of productivity gains. Initially in the 1990s and early 2000, we had productivity gains from manufacturing high-tech equipment or even low-tech equipment. Now we are getting gains coming from the application of that equipment. Employers are also very cautious--look at overtime, which is going up. They don't want to hire people. They would rather employ technology and work people harder.

SPRIGGS: People forget the human capital. The G.I. Bill created much more human capital, which came home to roost in the '60s when the economy took off. The level of inequality in skills in the U.S. shrank. You had a more skilled work force, so when you dip down into the bench, you continue to have productive workers.

SWONK: The baby boom aged. And with that, we got more skills--people who already knew their jobs well.

TIME: Does productivity growth impose short-term costs? People say, "I see productivity going up, and I don't wonder because now I am doing three people's jobs."

GOLDSTEIN: You can do all the kinds of things that all these companies are doing, especially at the auto plants, in order to bring down costs. But there is a limit, and that is one reason the GM plant in Linden, New Jersey, will close in 2005, because it can't bring costs down more. They shut down, refitted, brought back half the workers; half were permanently laid off. That refitted plant is now sunsetted for 2005. That is just one plant. But you could go across the board. There clearly is a ceiling on sustained productivity growth.

SPRIGGS: Businesses are biased toward cost cutting as a way of making profit margins, and that puts in a bias against adding new workers. We overestimate the ability to generate jobs in an environment where you make profit by cutting cost. The easiest cost to cut is labor cost: shutting down a plant with a couple of thousand workers.

BEHRAVESH: There is something of a trade-off between earnings growth and jobs growth, at least in the very near term. In that sense I think pressure on earnings will slow down job growth. We are all saying that.

SOHN: Corporate profits come from two sources: volume and margins. The volume is going up not that rapidly, so it must be margins. Why are margins going up? Are they raising prices? No. Cutting wages? No. It is coming once again from the productivity gains. If you look at the unit labor cost, meaning the cost to produce each dollar of sales, it fell in the third quarter, fell in the fourth quarter and then again in the first quarter into the second quarter. I think that is another reason margins are rising, supporting corporate profits.

SWONK: It started with Michael Milken and Henry Kravis, the hostile takeovers. You could actually fire a ceo. It started in the '80s, culminated in the '90s and was a massive trigger point to adopting new technologies more rapidly, and cost cutting becoming a mantra. People are rewarded for cost cutting.

TIME: Given the relatively weak job numbers, why are consumers so optimistic?

GOLDSTEIN: You would think that a public scared by that rise in unemployment, that rise in layoffs in the first quarter, would be in a pretty lousy state of mind. But consumer confidence right now is at a level associated with the middle of an expansion. If you are a baseball fan, it is almost like a team in midseason form on opening day. Even though wage growth has gone down, from 4% to 3.2%, there is still wage growth, and consumers are reasonably content, and so they are still spending.

SPRIGGS: The other dimension is that growing inequality has made it possible to have what appears to be a recovery because the brunt of unemployment falls on low-income families. You can still have consumption going because those at the bottom aren't contributing much in consumption anyway.

TIME: Are low interest rates and a strong housing market feeding into some of that spending?

SOHN: Consumers consider stock-market gains to be more transitory than housing gains. When housing values go up, you tend to spend more.

SWONK: It erases the argument that we save in our homes. We don't do that anymore. Last year people who refinanced their mortgages took out about $140 billion in cash, in the form of lower payments and cashing out some of their home equity.

TIME: Are housing prices going up so fast that they're in a speculative bubble?

GOLDSTEIN: No, there is no bubble.

BEHRAVESH: Housing is part of the answer. What the Fed succeeded in doing this cycle was turning housing from a destabilizing force in the economy to a stabilizing force. Housing won't boom the way it has been. We won't get 8%, 9% annual increases in the average price of a house, but it won't collapse. It will go down to a 2%, 3% increase. I don't think it will fall off the face of a cliff.

SOHN: Americans took out about $70 billion to $80 billion of their home equity. Did they blow it? I don't think so. The surveys show that the money went first to home remodeling, then to debt consolidation, investments in stocks and bonds, and consumption like buying a car or taking a vacation. It was used responsibly, boosting economic growth.

TIME: Why isn't the stock market responding to signs of a recovery?

SOHN: There is a crisis of confidence in the stock market. It is wider and deeper and more basic than it used to be. People are saying, "I knew the stock market was a gamble, but I thought it was an honest casino. I am mad and angry, and I am going out and buying a car or house instead of being in the stock market."

BEHRAVESH: Right now, two things are weighing down the market. One, the market got way ahead of itself in terms of the strength of recovery and is now coming to Earth. The second is Enronitis. As for fears of a dirty bomb or other attacks, they play into it day to day or week to week, but I don't think that is really what is pulling the market down.