Sunday, December 13, 2009

Possible Employment Turnaround

Alan Greenspan was on Meet The Press this morning and offered this analysis on employment:
it's very apparent to me that business got very frightened when the crisis occurred and presumed that the economy was going to go down far more sharply than it actually did. Indeed, I think Dr. Romer was making much the same point. What this means is that we have a level of--a level of employment at this stage which is barely adequate to staff the level of output, and that it seems to me virtually inevitable, if nothing else were to happen, that employment would start to come back fairly quickly.
It's not that I don't believe anything Mr. Andrea Mitchell says, but let's face it, the Maestro's words simply don't have the air of infallibility that they did in the past. Perhaps, though, Greenspan is on to something.

On his blog, Econbrowser, Professor Menzie Chinn highlights a report from Deutsche Bank:
Okun's Law is an empirical regularity that holds that for every one percent decline in GDP growth relative to potential, the unemployment rate will increase by about 1/2 percentage point....
So during the recent period, did this relationship hold?
Both charts show that the change in employment during this recession was noticeably more negative than the standard Okun's Law regression would predict. On the assumption that historical relationships reassert themselves, we surmise that employment could bounce back more strongly during this recovery...
That last sentence is meant to remind you that past performance is no guarantee of future results, but it is still a hopeful sign.

Greenspan was quick to remind viewers that even as employment recovers, the headline rate may not decrease due to the re-entry into the labor market of some that had previously given up on looking for work.

If payrolls were slashed this year further than the underlying conditions really warranted, perhaps a turnaround of the employment situation will happen sooner rather than later.

1 comment:

Dad29 said...

It's possible that G'span's theory will hold (Okun's, too.)

But there is this confounded demand problem. That is, there IS far.