Productivity used to be pro-cyclical, said CoreLogic [stock CLGX][/stock] Chief Economist Mark Fleming during a presentation at REO Expo last week.
If you were laid off from a production line, you didn’t go job-hunting. You waited by the phone until the factory called again when demand returned, he said. This, in economist speak, is called a “quasi-fixed factor,” Fleming explained.
But today, labor has changed. We don’t make as much stuff. And our job creation doesn’t rebound with demand, he said. Labor is more flexible. Employers can more easily substitute capital for headcount. This throws off the balance so fundamental to a guy named Arthur Melvin Okun.
Okun’s law says that to reduce the unemployment rate by a full percentage point in one year, gross domestic product growth needs to be about 2% faster than the long-term trend growth. Right now, many expect the trend growth to hover at 2.5% for the long term.
Given the progress on unemployment (see chart below), we should have seen a 4.5% GDP growth, but right now many are forecasting less than 2% GDP for the short term.
What gives?
“All else is not held constant. Okun assumed that labor force participation would have remained about the same and what would drive down unemployment is true job creation. The fact is this time that labor force participation declining has been one of the primary reasons for a lower unemployment rate. So Okun could still be right, its just that this time we are fixing things by reducing the labor force,” Fleming said. (See next chart below. The dark blue line shows the underemployed rate.)
That brings us to another chart. The recovery rate in unemployment under President Obama actually resembles the same trend line as the 2001 recovery under President George W. Bush. Fleming said this new labor force has been trending away from a demand-based factor since the mid-1980s.
When compared to the early “V-shaped” rebounds earlier in the 20th century, you can see the effect of this new labor force — one not tied to demand but rather capital.
“There is a clear differentiation between the industrial post WWII economy when Okun’s law held better, productivity was pro-cyclical, and labor quasi-fixed,” Fleming said. “We can see in the ‘U-shaped’ labor recoveries of the modern U.S. economy that the ability to substitute capital for labor clearly makes labor market recoveries take much longer.”
Click here to see a HousingWire video interview with Fleming at REO Expo.
