Growing Businesses Cut Payrolls, Too

Casey B. Mulligan is an economics professor at the University of Chicago.

In many industries, sharp employment cuts during the recession cannot be attributed to a lack of demand.

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The standard narrative of the 2008-9 recession and lack of recovery has been that the financial crisis, housing crash, excessive debt and other factors caused consumers to spend less, and businesses to invest less. With the private sector spending less, employers had a hard time selling their products, so they had to lay workers off, cut back on new hiring, or both.

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As Paul Krugman put it, “Businesses aren’t hiring because of poor sales, period, end of story.”

Yes, consumer spending dropped sharply, as did business investment, in 2008 and 2009. But that observation does not tell us whether low employment is a result of low spending or if the reverse is true.

I agree that a few important industries, including manufacturing, home construction and much of the retail sector, did, and still do, suffer from significantly low demand. Those industries vividly illustrate the demand narrative — but they are only a minority of the overall private sector.

The lack-of-demand hypothesis is incorrect for a large fraction of the economy. The chart below illustrates output, revenue and employment from the United States wireless telecommunications industry (that is, cellphones). This industry has clearly not been suffering from a drop in customer demand.

Since 2007, the number of mobile connections has increased almost 20 percent, to 303 million from 255 million. The Bureau of Economic Analysis estimates that consumer spending on mobile communications increased 15 percent (not inflation adjusted) over that time frame.

Despite continued demand growth, employers in the wireless telecommunications industry sharply cut employment, at an even greater rate than employers in other industries. After growing 6 percent from 2005 to 2007, the industry’s employment had fallen 14 percent by 2010.

There is no way to blame that sharp employment drop on “poor sales.”

This pattern is not limited to the cellphone industry. Other industries sharply cut back their employment even while their revenues were falling little, if at all; the employment loss from such industries numbers in the millions.

To examine this issue more systematically, I used the industry economic accounts published by the Bureau of Economic Analysis. Industries can be examined at varying levels of detail: I divided the private sector into 21 industries and classified them according to the percentage change in their revenue between 2007 and 2009. The table below shows the results.

In two of the industries, education and health care, revenues grew more than 2 percent (in fact, their increase was about 10 percent), and their employment increased, as is shown in the table’s top row. Five other industries summarized in the next row had a revenue increase but still sharply cut their employment. Four others had minor revenue declines and cut their hiring sharply, too.

The number of full-time equivalent employees declined 2.2 million in those nine industries combined, even though it seems that those industries had enough sales to maintain their employment. Something else motivated them to cut employment and motivated them to forgo an opportunity to hire some of the many workers laid off by declining industries.

As I wrote before much of the employment decline happened, I think “some employees face financial incentives that encourage them not to work, and some employers face financial incentives not to create jobs.”

That’s why even growing business are now getting by with substantially fewer employees.

When Times Get Tough, the Elderly Work

Casey B. Mulligan is an economics professor at the University of Chicago.

The elderly are one group whose work hours now exceed what they were before the recession began. This pattern is most evident in the most depressed regions of the United States.

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The recession has varied in different regions of the United States. In some areas – including Arizona, California, Florida, Hawaii, and Nevada – housing prices surged more dramatically in the early part of the 2000s than they did in the rest of America, and their economies fell hard when housing prices collapsed.

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One view is that such areas experienced a deeper recession because their banks became overwhelmed with defaults and were unable or unwilling to make new loans to consumers and businesses. Without those new loans, demand collapsed more than it did nationwide, and jobs were especially difficult to find, even while people living in the area were especially eager to work.

Absent demand, just about all workers will have a tough time retaining a job or finding a new one.

Another view is that old loans are the problem, not newer ones. A significant fraction of households and businesses are typically so burdened with the debts they accumulated during the housing surge that they have little incentive to produce and work, because their creditors would get most, if not all, of the fruits of their labor.

In contrast to the no-new-loans-and-no-demand theory, old loans do not affect all workers; some are less burdened by debt. The elderly may fall in this category, because they are more likely to have saved money over their lifetimes and to have paid off their mortgages. Although some elderly working for debt-burdened employers may have lost jobs, on average the elderly in these areas should be working more because they have better incentives to do so.

The chart below compares 2007-10 changes in work hours for two areas –- the regions where housing prices rose and fell the most, on the left side of the chart, and the rest of the United States on the right. For middle-aged and younger people (blue bars), hours worked fell 12 percent in the large cycle regions and about 9 percent in the rest of the United States.

Hours worked by elderly people increased in both regions.

As I noted a few weeks ago, the average American elderly person worked more in 2010 than did the average elderly person before the recession began, even while work hours were down sharply for middle-aged and young people. The chart above shows that this is true even in the states that generally experienced the largest collapse during this recession.

Demand is not the only factor driving employment patterns.

More Evidence That Supply Matters

Casey B. Mulligan is an economics professor at the University of Chicago.

The supply of various types of workers has increased during the recession, continuing an earlier trend. That such trends continue to be associated with trends for employment contradicts the Keynesian claim that supply suddenly stops mattering during recessions and “liquidity traps.”

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A number of bloggers have pointed out that employment in Texas has been rising and has almost reached prerecession levels. Paul Krugman’s explanation is that the supply of people available and willing to work has been increasing in Texas, continuing a previous trend.

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One example of that supply is the inflow of immigrants from nearby Mexico; another is the migration of Americans seeking cheaper housing. I might quibble about the details, but I agree that supply trends are crucial for understanding what has happened in Texas.

In previous posts I have pointed out that national employment per capita actually increased among the elderly during the recession. I, and other researchers, concluded that elderly employment deviated so much from the general population because of changes in elderly labor supply.

In reaction to my post, Dean Baker attributed the elderly increase during the recession to a previous trend. Because the previous trend was itself the result of supply, Dr. Baker’s explanation of the recession is essentially a supply increase, too.

So we all agree that in at least two cases labor supply increased during the recession, and in each case the result was more jobs for the affected groups, or at least fewer job losses than in the general population.

Recession-era supply episodes like these are important to identify, because they can prove or reject Keynesians’ fundamental assertion (so far unproven) that supply does not matter during a recession or a “liquidity trap” such as we’ve experienced since the recession began.

Consider, hypothetically, an immigration trend that continued even after the recession. In my view, the market would create jobs for many, but not all, of the immigrants and would continue to do so after the recession.

In the Keynesian view, immigration might create jobs before the recession, but could not create them once the recession began because “what’s limiting employment now is lack of demand for the things workers produce,” Professor Krugman wrote. “Their incentives to seek work are, for now, irrelevant.”

In the Keynesian view, all that extra supply does during the recession is add to unemployment rather than adding to employment. In other words, supply trends normally affect employment, but Keynesians assert that they cease to affect employment during a recession or liquidity trap.

The chart below shows monthly employment (left scale) and unemployment (right scale) in Texas since 2007. Despite the fact that our nation is in a liquidity trap (near-zero interest rates on Treasury bills, the results of the extra supply in Texas since 2009 have been to increase employment much more than increase unemployment.

Or consider that more recent cohorts have found themselves in careers that involve less manual labor, producing a increasing number of people reaching age 65 and still willing and able to continue their work. In my view, elderly employment would rise and might even be rising enough to more than offset a demand reduction during a recession.

In the Keynesian view, all that extra supply does during the recession is add to unemployment rather than adding to employment.

When it comes to analyzing specific events during the recession, fiscal stimulus advocates often take the common sense approach that labor supply affects employment. But when it comes to making promises about the anticipated results of a large fiscal stimulus, they insist, without proof, that supply doesn’t matter.