For the unemployed, this analysis from Merrill Lynch (via FT Alphavile), will prove welcome. Contrary to the conventional wisdom, this recovery won’t be jobless, the firm says. Why? Firms overreacted when they cut.
We believe that US companies over-reacted to the recession. Fearing a depression they not only cut jobs aggressively, but inventories, investment and anything else that moved. That hunker-down mentality has spilled over into the early months of the recovery.
Chart 2 illustrates the over-reaction. It compares the lost output and lost work hours for the nonfarm business sector in the 11 recessions in the post-war period (we have excluded the brief 1980 recession). Most recessions are along the “regression line.” By contrast, in the current recession hours have been cut about 2.5% more than normal. This gap will get even bigger if the Bureau of labour Statistics goes ahead with the revision it hinted at in the latest jobs report. This overshot is confirmed by data showing unusual strength in productivity during the recession. If you are thinking you are working too hard lately, you have company.
To some extent, though, this comes back to the Paul Krugman’s output gap idea — the idea that there’s a lot of unused capacity ready to come online. But this depends on there being a match between skills held by the jobless, and the skills needed by companies, and given the past several years, in which we trained so many people to do housing-related work, this is no sure bet. That being said, many non-housing related companies did cut jobs aggressively, and presumably they’ll need to hire many of the same type of workers that they laid off.