This Recovery Feels Like Recession:
Economy Expands, Payrolls Shrink
By JON E. HILSENRATH

Staff Reporter of THE WALL STREET JOURNAL
Economist Robert Hall has been puzzling over a thorny
question for nearly a year: What do you call an
economy that has started expanding again but keeps
destroying jobs?

Mr. Hall heads a committee at the National Bureau of
Economic Research, an academic group in Cambridge,
Mass., that declares when U.S. recessions begin and
end. In May of last year, Mr. Hall and his colleagues
believed the latest recession might be over. Consumers
were spending more and economic output was rising. All
that the committee members needed to see was a few
months of uninterrupted job growth to announce the end
of the recession. "It seemed like the timing was
imminent," he says. But Mr. Hall is still waiting.

Instead of expanding employment, companies are
continuing to shed jobs at a furious pace -- 525,000
nonfarm payroll positions in the past three months
alone. Since March 2001, when the recession began, the
U.S. economy has lost 2.1 million jobs. The total
number of people unemployed -- including discouraged
workers who would prefer to work but have stopped
looking -- is about 9.2 million. And the number of
people who are working part time because they can't
find full-time work is 4.8 million, up 46% since 2001,
according to the Bureau of Labor Statistics.

In short, the U.S. is experiencing the most protracted
job-market downturn since the Great Depression. It has
left behind a remarkably broad swath of workers --
from young to old, and from high-school dropouts to
the highly educated -- even as the economy has started
growing again.

Why is this happening? The labor market is in the
midst of structural change, with numerous industries,
from manufacturers to brokerage firms and airlines to
hotels, adjusting to a new economic order after the
boom of the late 1990s. Intensifying competition from
abroad, slow growth at home and a relentless push for
productivity are driving this change. What has
surprised economists is not so much how harsh the
adjustment has been -- after all, the unemployment
rate remains relatively low at 6% -- but how long it
is taking to play out and how broadbased it has
become.
Erica Groshen, a labor economist with the Federal
Reserve Bank of New York, recently studied employment
trends in 70 industries over the past 30 years. She
found that the structural change is vast. "Before in a
recession you had a lot of companies giving people
temporary layoffs, saying, 'We'll call you back when
we need you,' " she says. "That is not what firms do
anymore."

During recessions in the 1970s and 1980s, about half
of all jobs were in industries that tended to go
through cyclical swings, Ms. Groshen says -- meaning
laid-off workers would be called back. The other half
experienced structural changes -- meaning jobs that
were eliminated were never meant to come back. Ms.
Groshen says this started to change in the 1990
recession and has intensified in this downturn. Today,
she says, 75% of jobs are in industries going through
structural change.

Payrolls in the electronics sector, and for producers
of industrial equipment, have declined for 28 straight
months. In communications, payrolls have fallen for 24
months. In the securities and airline industries, they
have fallen in 16 of the past 24 months.

In some ways, this is the downside of a productivity
boom that created much optimism about the economy
during the 1990s. Productivity growth means that
companies are squeezing more output from existing
workers. Over the long run, most economists agree
productivity growth is good for workers, because it
tends to lead to higher wages. But in the short run,
it is creating a problem. Worker productivity has been
growing faster than the overall economy. That has
allowed corporate executives to meet small increases
in demand while still eliminating jobs.

"You end up with a jobless recovery," says Jared
Bernstein, a labor economist with the Economic Policy
Institute, a left-leaning think tank in Washington.
"It is indistinguishable from recession for many
working families."

A common definition for a recession is two consecutive
quarters of contracting gross domestic product. The
nation's GDP -- the broadest measure of economic
output -- has expanded at an average annual rate of
2.7% since the fourth quarter of 2001. During the same
period, the productivity of the nation's work force --
which is defined as its output per hour of work -- has
expanded at a much faster rate of 4.2%. While worker
productivity often increases in the early stages of a
recovery, this time the mismatch between productivity
and overall economic growth is unprecedented.

At the beginning of eight recoveries between 1948 and
1982, GDP grew faster than productivity. In those
cases, companies had to add workers to meet demand for
their goods and services. During the recovery of 1991,
productivity grew slightly faster than output in the
early stages, but the difference wasn't as stark as it
is now.

"If you want people to have jobs, your demand-side
growth has to be much stronger," says Harry Holzer, a
labor economist at Georgetown University. The nation
would need a 3.5% growth rate in GDP for the
unemployment rate not to get worse, he says, but "3.5%
is looking optimistic for this year. This might be
quite a protracted downturn."

Permanent job losses are also the result of the
competition created by globalization, which has forced
companies to cut positions in the U.S. and move them
to places such as Mexico, China or India, where labor
is much cheaper. "Before the 1991 recession, most
people got their old jobs back," says Robert Reich,
former Labor Department Secretary and now a professor
of economic and social issues at Brandeis University.
"After 1991, most people didn't get their old jobs
back. Those jobs went abroad, or they were automated
out of existence."

On April 15, A.O. Smith Corp., a Milwaukee-based
producer of electric motors, announced that its net
earnings rose 13% in the first three months of the
year from a year earlier, to $13.7 million. A sign of
economic recovery? Maybe. But five days earlier, the
company told employees at its plant in McMinnville,
Tenn., that it was eliminating 300 jobs there and
moving production of motors for air-conditioning and
ventilation systems to Juarez, Mexico.

"The reason we're doing this is to improve our cost
position," said Ed O'Connor, vice president of public
affairs. "We have got to continue to be competitive."
These changes help to create a remarkable degree of
dynamism in the economy, as workers find their way out
of shrinking industries and into ones where jobs are
available. Terri Brooks, 42 years old, and her
daughter, Michelle Stauffer, 23, are making just such
a shift. Both are production workers at a Maytag Corp.
refrigeration plant in Galesberg, Ill.

Stung by competition from China and Korea, Maytag is
shutting the plant and moving its operations to
Mexico. Ms. Stauffer, who works the night shift, will
lose her job in July; Ms. Brooks will lose hers next
year. So mother and daughter are taking classes part
time at nearby Carl Sandberg College, where Ms. Brooks
is training to be a medical secretary and her daughter
is signed up to become a dental hygienist.

"I figure there will always be a job in the medical
field," says Ms. Brooks.

In addition to being protracted, this downturn has
also become an equal opportunity recession. In the
past, recessions tended to have the greatest ferocity
for less-educated workers and younger workers. But
this downturn -- because it has been spread out across
so many industries -- has created a broader class of
job-market casualties. Age is no longer an important
distinction. And well-educated workers, used to being
sheltered in a slump, have been hit hard.

In the last three years, the unemployment rate for
college graduates over 25, who enjoyed the lion's
share of the economy's gains during the 1980s and
1990s, has risen by 1.6 percentage points, not much
less than the 2.1-percentage-point increase for
high-school dropouts.

Many educated workers were concentrated in industries
hit hardest by the downturn, such as technology and
finance. The unemployment rate for computer scientists
and mathematicians rose from 0.7% in February 1998 to
about 6% at the end of 2002, according to research by
the Economic Policy Institute.

Educated workers seem especially prone to bouts of
long-term unemployment in this downturn. Of the 1.9
million workers who have been unemployed for six
months or more, one in five is a former executive,
professional or manager, according to a study by the
National Employment Law Project, a nonprofit advocacy
group for the unemployed. Because these workers have
specific, often technical, skills it sometimes takes
them longer to find a job that matches those skills.
On the surface, the job market might not look all that
bad. At 6%, the unemployment rate is only a little
above its average of 5.6% during the past 55 years. In
1982, in contrast, it reached 10.8%.

In 1992, it reached 7.8%. But for the 8.4 million
Americans who are now unemployed, the protracted
nature of this downturn means it has been
excruciatingly difficult to get work again. For some,
job searches are dragging on long after their
unemployment benefits have expired and they have
plowed through their savings. In the last year, nearly
2.8 million people have exhausted unemployment
benefits.

Many others are scrambling in ways that don't get
picked up in unemployment statistics. They're taking
lower-paying jobs, going back to school to get new
skills, or becoming independent consultants and
picking up small projects when they can. "A lot of
people are losing ground economically," says Mr.
Reich.
One of those people is Wanda Whitson, a 47-year-old
college graduate. In December 2001, she lost her job
as a public-relations manager with Key3Media Group
Inc., which produces technology trade shows. Ms.
Whitson earned $65,000 and traveled around the
country. Eighteen months later, she hasn't been able
to find full-time work.

To make ends meet, she's working as a salesperson at a
Crate & Barrel store in Boston, earning about $7 an
hour. She has also been doing temp work, ranging from
checking coats at a local book fair to working as an
administrative assistant for a finance company. But it
isn't enough to cover all of her expenses. "It's a
little scary. I'm down to the point where in three or
four months, if something doesn't come along, I don't
know what I'm going to do," she says.

Economists have a term for the wrenching adjustments
to today's economy: "creative destruction." The term
was coined by an Austrian-American economist named
Joseph Schumpeter after the Great Depression ended. In
a capitalist economy, Mr. Schumpeter argued, weak
industries and companies had to be destroyed in order
for thriving ones to take root. He called it a
"perennial gale of creative destruction."

While manufacturing has shed 1.7 million jobs in the
last two years, the health-care sector has added
522,000. The education field has added another
190,000. Mr. Reich, the former Labor Secretary, says
this kind of growth leaves him feeling that the trends
in the job market will ultimately prove to be positive
events. "The labor market is extremely flexible," he
says. "People are adapting."

But the shifts put many workers on an especially
difficult journey. One problem with today's long bouts
of unemployment is that the longer an individual stays
out of work, the more likely he or she is to take a
new job at a much lower salary. Another big concern is
finding a job that provides health insurance. Federal
law requires employers to allow dismissed workers to
stay on their health plans for about 18 months. But
for many people, long-term unemployment means that
coverage is running out.

These trends have implications for policy makers, too.
Workers typically receive 26 weeks of state
unemployment benefits after they are laid off. The
system was set up as part of the Social Security Act
in 1935. Now, workers can also receive an additional
13 weeks of federal aid. But because many people are
experiencing exceptionally long spells looking for
work, millions are running through all of their
unemployment insurance before they find a new job.

According to Labor Department statistics, 43% of those
who sign up for insurance exhaust their 26-week
benefits, the highest rate in at least 30 years.
One solution would be to offer unemployment insurance
for a longer period of time. But economists are
reluctant to propose that because they fear it would
reduce the incentive for unemployed people to search
for work. Germany, for instance, offers unemployment
insurance for 12 to 32 months and other assistance can
continue indefinitely; its unemployment rate is 10.7%.

At the National Bureau for Economic Research, the
enduring job-market weakness has sparked a debate
about some very basic economic questions. Like this
one: How do you know when a recession ends? Some
members, including Robert Gordon, a Northwestern
University professor and an expert on productivity
trends, believe the recession actually ended a long
time ago, because overall output, as measured by
indicators such as gross domestic product and national
income, have been rising since late 2001. "There
clearly was a trough," says Mr. Gordon.

But Mr. Hall, a Stanford University professor, isn't
so sure. "I don't want to say that a recession is over
if more and more people are unemployed and job growth
is negative," he says. For now, he says, he prefers to
wait a little longer.

Originally at

http://online.wsj.com/article_print/0,,SB105415483048293700,00.html

Write to Jon E. Hilsenrath at jon.hilsenrath@wsj.com