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Cashell, Brian W.

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1 The dates of business cycle turning points (i.e., the ends of economic expansions andcontractions) are determined by the business cycle dating committee of the National Bureau ofEconomic Research. 2  For a more detailed comparison of the current expansion with past experience and anexamination of the outlook for the labor market, see: CRS Report RL32047, The ‘JoblessRecovery’ From the 2001 Recession: A Comparison to Earlier Recoveries and PossibleExplanations, by Marc Labonte and Linda Levine.Congressional Research Service ˜ The Library of CongressCRS Report for CongressReceived through the CRS WebOrder Code RS21602August 27, 2003Employment Growth in the Current  Economic ExpansionBrian W. CashellSpecialist in Quantitative EconomicsGovernment and Finance DivisionSummaryAlthough real gross domestic product (GDP) surpassed its previous peak in thefourth quarter of 2001, total employment still had not regained its previous peak as ofJuly 2003.  For that reason, the economy is said by some to be experiencing a “joblessrecovery.”  It is not unusual for the production of goods and services to increase aheadof employment in the early stages of an economic expansion.  But in the case of thecurrent expansion, the lag is longer than usual.  One explanation for the longer laghinges on the relationship between employment and productivity growth.    The increasein productivity growth may have temporarily reduced the unemployment rate below therate at which inflation might be expected to accelerate.  If that is true, and if that rate hassince rebounded, then it is unlikely that the current expansion will be able to sustain thecombination of low unemployment and inflation that characterized the latter stages ofthe 1990s economic expansion.  This report will be updated as economic events warrant.The current economic expansion, which began in November 20011, has been one ofrelatively sluggish employment growth.  Although real gross domestic product (GDP)surpassed its previous peak in the fourth quarter of 2001, total employment still had notregained its previous peak as of July 2003.  For that reason, the economy is said by someto be experiencing a “jobless recovery,” not unlike the beginning of the economicexpansion of the 1990s.2CRS-2It is not unusual for the production of goods and services to increase ahead ofemployment in the early stages of an economic expansion.  But in the case of the currentexpansion, the lag is longer than usual.  Whether or not there is a role for policy topromote not just economic growth but employment growth in particular may depend onthe reasons for the relatively sluggish recovery in the labor market.This report begins by examining the relationship between employment and outputover the course of a typical business cycle.   In particular, factors that may affect growthin output and employment over the course of the business cycle are discussed.  Finally,potential explanations for the sluggish employment growth in the current economicexpansion are explored.The Labor Market, Output, and the Business CycleThe connection between the market for goods and services and the market for labormight be described as elastic.  Variations in the demand for goods and services need notimmediately affect labor market conditions for a number of reasons.  In the very short run,for example, an increase in demand for goods can be met by reducing the stock ofinventories. Firms also face significant costs associated with the hiring and firing of workers.  Ifa drop in the demand for a firm’s goods is believed to be temporary, that firm may choosenot to lay off workers but keep them in anticipation of a turnaround in business.  As aresult, hours worked may vary more in the short run than total employment.Another reason a firm may be reluctant to lay off workers in the short run is that itmay have invested considerable time and money in the training of its workforce.  Whatthe firm might save by laying off some employees could well be much less than what itwould cost to hire and train new workers when business picks up.  Conversely, whenbusiness recovers, there is less immediate need to hire.  Firms can increase output withoutincreasing employment by increasing labor hours, and getting idle labor working again.Because of these factors, employment tends to pick up relatively slowly in the very earlystages of an economic expansion. In contrast, there is a tendency for output to grow relatively rapidly in the early stagesof an expansion.  This is due to the cyclical nature of labor productivity.  At the beginningof an economic contraction, output falls.  But, because firms are initially reluctant to layoff workers, output falls by more than employment.  That causes productivity growth, oroutput per worker, to decline.If a contraction continues for an extended period, firms will start to lay off workers,but the first to be laid off will be among those most recently hired with less training andexperience and thus are relatively less productive than those who have been with the firmlonger.  Reducing employment tends to moderate any slowdown in the growth of laborproductivity.As the contraction comes to an end, and the economy starts to expand again, firmscan increase their output of goods or services by increasing hours or putting idle laborback to work.  In this way output can be increased with relatively little increase in labor,and that yields an increase in measured productivity.  Assuming those who are moreCRS-3Figure 1. Employment and the Business Cycleproductive are hired first, as the economy continues to expand and production continuesto increase, each addition to employment contributes less to overall output and so thegrowth rate of productivity slows.Because of this cyclical pattern, it is not unusual to see output recover from theeffects of an economic downturn more rapidly than employment.  In the eight economicexpansions since 1948, employment has regained its previous peak, on average, 1.75quarters after real output surpassed its previous peak.In the last two economic expansions, however, that lag has increased.  In theexpansion of the early 1990s, employment did not regain its previous peak until 5 quartersafter real output did.  In the current economic expansion, employment still had notreached its previous peak 6 quarters after real GDP did. Figure 1 compares employment growth during the current economic expansion withprevious expansions.  Average employment growth following each of the cyclical peaksis shown.  The starting point for each line is the previous peak in civilian employment,not the NBER business cycle peak.  The expansion of the 1990s is shown separatelybecause it too was described as a jobless recovery.Source: Department of Labor, Bureau of Labor Statistics.The chart makes clear that employment in the current economic expansion hasrecovered more slowly than has been the case in prior economic upswings.  It also showsthat the labor market was slower than usual to recover following the 1990 economiccontraction.  It is unclear why the labor market was so slow to recover from the 1990 economiccontraction.  Some have pointed to the relative mildness of that contraction, and to thefact that job losses were widespread, and included many white collar jobs and jobs in theCRS-43   Jennifer M. Gardner, “The 1990-91 recession: how bad was the labor market?,” Monthly LaborReview, June 1994, pp. 3-11.4  Robert J. Gordon, “The Jobless Recovery: Does It Signal a New Era of Productivity LedGrowth?,” Brookings Papers on Economic Activity, 1:1993, pp. 271-316.5  Bharat Trehan, “Productivity Shocks and the Unemployment Rate,” Federal Reserve Bank ofSan Francisco Economic Review, 2003, pp. 13-27.finance, insurance, and real estate industry.3  It has also been suggested that productivitygrowth may have played a role.  Productivity growth briefly surged in 1992, which mayhave led policymakers to underestimate the economic growth rate that would be requiredto reduce unemployment.4  The quantity of goods and services produced can increase either by employing morelabor or by increasing the productivity of the labor that is employed.  In the most recentexpansion, it would appear that much of the growth in output since the previous peak canbe explained by increasing productivity rather than through an increasing labor force.  Itmay be that the increasing productivity has also played a role in the sluggish recovery ofthe labor market in the current expansion.Why is Employment Slow to Recover?Although it is typical for employment growth to lag overall economic growth in theearly stages of an expansion, the lag is longer than usual in the current upswing.  Oneexplanation for the longer lag hinges on the relationship between employment andproductivity growth.The level of employment at any time is determined by the supply of and demand forlabor.  On the supply side are individuals with different skills and abilities looking forwork.  On the demand side are firms looking for workers with the specific skills theyrequire to produce goods and services.  Jobseekers are assumed to have a minimumsalary, in economics jargon their “reservation wage,” they are willing to accept.  Untilthey get an offer that satisfies this minimum they will continue searching.5The wage a firm is willing to pay depends, in part, on worker productivity.  Anincrease in productivity is likely to lead to an increase in the wages offered by employers.Other things being equal, a higher wage will lead to an increase in employment becausea greater number of jobseekers will be able to satisfy their reservation wage.This implies an asymmetry in that employers are aware of the increase inproductivity and that jobseekers are not.  If there ever is such a disparity, it seems unlikelyto persist.  Eventually, workers and jobseekers could be expected to perceive the increasein productivity and consequently raise their reservation wage.  Any employment effectresulting from a one-time increase in productivity growth would thus be likely to betemporary.This is, in the view of some analysts, what happened in the late 1990s.  More thana few economists were surprised that, during the expansion of the 1990s, bothunemployment and inflation rates remained low by recent historical standards.  It hadCRS-56  See: CRS Report RL31428, Productivity Growth: Recent Trends and Future Prospects, byBrian W. Cashell.7  CRS Report RL30391, Inflation and Unemployment: What is the Connection?, by Brian W.Cashell.been believed that an unemployment rate much below 6% was inconsistent with falling,or even stable, rates of inflation.There was one explanation for the concurrently low rates of inflation andunemployment of the second half of the 1990s that many found convincing.  Beginningin 1995, the growth rate of productivity accelerated.6  That was unusual at that stage ofan economic expansion and thus unexpected.  If workers and jobseekers were slow torecognize that productivity growth had accelerated they would also be slow to raise theirwage demands to reflect their increased contribution to the production of goods andservices.If firms noticed the increase in productivity before workers did, then the demand forlabor might rise in advance of the wage demands of workers.  In this way, unemploymentmight fall without any upward pressure on wages.  That seems to be what happened in thelatter stages of the 1990s economic expansion.But it may be unrealistic to assume that such an asymmetry in the perceptions offirms and jobseekers can persist.  Sooner or later workers are likely to become aware ofthe increase in productivity and increase their wage demands to reflect that increase.  Tothe extent that wage demands increase,  the rate of hiring would tend to slow.  If that iswhat is happening now, it may be retarding growth in employment just as the economyis in the early stages of expansion.Another factor that may explain the apparently slow recovery of employment  is thatthe peak level of employment reached at the end of the 1990s expansion may have beenhigher than would have been the case in the absence of the acceleration of productivity.Figure 1 shows the recent history of the civilian unemployment rate.  Up until the mid 1990s, many economists estimated that the lowest theunemployment rate could go without risking an acceleration of inflation was about 5.5%.7But the unemployment rate went well below that level in the late 1990s without anyappreciable rise in the inflation rate.  This is also known as the non-accelerating inflationrate of unemployment, or NAIRU. Because of the acceleration in productivity whichbegan in 1995, there may have been a temporary decline in the unemployment rate belowwhich inflation might be expected to accelerate.  But, if that decline was only temporary,then some of the slack in the job market may have been reduced by a rebound in theNAIRU, narrowing the gap between actual and “full” employment.CRS-6Figure 2.  Civilian Unemployment RateSource: Department of Labor, Bureau of Labor Statistics.ConclusionsEconomic expansions have many characteristics in common, but the current one isnotable for the relatively slow recovery in the labor market.  One reason for that may bethat the preceding contraction was relatively mild.  The unemployment rate so far hasremained well below the level reached in each of the two previous contractions.The acceleration in productivity growth observed in the second half of the 1990s mayalso be responsible.  The increase in productivity growth may have temporarily reducedthe unemployment rate below which inflation might be expected to accelerate.  If that istrue, and if that rate has since rebounded, then it is unlikely that the current expansion willbe able to sustain the combination of low unemployment and inflation that characterizedthe latter stages of the 1990s economic expansion. 

Employment Growth in the Current Economic Expansion

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Federal Publications Key Workplace Documents 
August 2003 
Employment Growth in the Current Economic Expansion 
Brian W. Cashell 
Congressional Research Service 
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Employment Growth in the Current Economic Expansion 
Keywords 
Employment, economic, growth, productivity, expansion, inflation, business, labor, market, output, goods, 
firm 
This article is available at DigitalCommons@ILR: https://digitalcommons.ilr.cornell.edu/key_workplace/191 
Order Code RS2160 2
August 27, 2003
	
CRS Report for Congress
Distributed by Penny Hill Press
	
http :llpennyhill .co m
Employment Growth in the Current
Economic Expansio n
Brian W. Cashel l
Specialist in Quantitative Economic s
Government and Finance Divisio n
Summary
Although real gross domestic product (GDP) surpassed its previous peak in th e
fourth quarter of 2001, total employment still had not regained its previous peak as o f
July 2003 . For that reason, the economy is said by some to be experiencing a "jobles s
recovery." It is not unusual for the production of goods and services to increase ahea d
of employment in the early stages of an economic expansion . But in the case of the
current expansion, the lag is longer than usual. One explanation for the longer lag
hinges on the relationship between employment and productivity growth . The increas e
in productivity growth may have temporarily reduced the unemployment rate below the
rate at which inflation might be expected to accelerate . If that is true, and if that rate has
since rebounded, then it is unlikely that the current expansion will be able to sustain th e
combination of low unemployment and inflation that characterized the latter stages o f
the 1990s economic expansion. This report will be updated as economic events warrant .
The current economic expansion, which began in November 200 1 1 , has been one o f
relatively sluggish employment growth . Although real gross domestic product (GDP )
surpassed its previous peak in the fourth quarter of 2001, total employment still had no t
regained its previous peak as of July 2003 . For that reason, the economy is said by som e
to be experiencing a "jobless recovery," not unlike the beginning of the economi c
expansion of the 1990s . 2
' The dates of business cycle turning points (i .e., the ends of economic expansions and
contractions) are determined by the business cycle dating committee of the National Bureau o f
Economic Research .
2 For a more detailed comparison of the current expansion with past experience and an
examination of the outlook for the labor market, see : CRS Report RL32047, The `Jobless
Recovery' From the 2001 Recession : A Comparison to Earlier Recoveries and Possible
Explanations, by Marc Labonte and Linda Levine .
Congressional Research Service + The Library of Congress
CRS-2
It is not unusual for the production of goods and services to increase ahead o f
employment in the early stages of an economic expansion . But in the case of the cun-ent
expansion, the lag is longer than usual . Whether or not there is a role for policy t o
promote not just economic growth but employment growth in particular may depend o n
the reasons for the relatively sluggish recovery in the labor market .
This report begins by examining the relationship between employment and outpu t
over the course of a typical business cycle. In particular, factors that may affect growth
in output and employment over the course of the business cycle are discussed . Finally,
potential explanations for the sluggish employment growth in the current economi c
expansion are explored .
The Labor Market, Output, and the Business Cycl e
The connection between the market for goods and services and the market for labo r
might be described as elastic . Variations in the demand for goods and services need not
immediately affect labor market conditions for a number of reasons . In the very short run,
for example, an increase in demand for goods can be met by reducing the stock o f
inventories .
Firms also face significant costs associated with the hiring and firing of workers . If
a drop in the demand for a firm's goods is believed to be temporary, that firm may choos e
not to lay off workers but keep them in anticipation of a turnaround in business . As a
result, hours worked may vary more in the short run than total employment .
Another reason a firm may be reluctant to lay off workers in the short run is that it
may have invested considerable time and money in the training of its workforce . What
the firm might save by laying off some employees could well be much less than what i t
would cost to hire and . train new workers when business picks up . Conversely, when
business recovers, there is less immediate need to hire . Firms can increase output without
increasing employment by increasing labor hours, and getting idle labor working again .
Because of these factors, employment tends to pick up relatively slowly in the very earl y
stages of an economic expansion .
In contrast, there is a tendency for output to grow relatively rapidly in the early stages
of an expansion . This is due to the cyclical nature of labor productivity . At the beginnin g
of an economic contraction, output falls . But, because firms are initially reluctant to la y
off workers, output falls by more than employment . That causes productivity growth, o r
output per worker, to decline .
If a contraction continues for an extended period, firms will start to lay off workers ,
but the first to be laid off will be among those most recently hired with less training and
experience and thus are relatively less productive than those who have been with the firm
longer . Reducing employment tends to moderate any slowdown in the growth of labo r
productivity.
As the contraction comes to an end, and the economy starts to expand again, firm s
can increase their output of goods or services by increasing hours or putting idle labor
back to work . In this way output can be increased with relatively little increase in labor ,
and that yields an increase in measured productivity . Assuming those who are more
CRS- 3
productive are hired first, as the economy continues to expand and production continue s
to increase, each addition to employment contributes less to overall output and so th e
growth rate of productivity slows .
Because of this cyclical pattern, it is not unusual to see output recover from the
effects of an economic downturn more rapidly than employment . In the eight economic
expansions since 1948, employment has regained its previous peak, on average, 1 .75
quarters after real output surpassed its previous peak.
In the last two economic expansions, however, that lag has increased. In the
expansion of the early 1990s, employment did not regain its previous peak until 5 quarter s
after real output did . In the current economic expansion, employment still had no t
reached its previous peak 6 quarters after real GDP did .
Figure 1 compares employment growth during the current economic expansion wit h
previous expansions . Average employment growth following each of the cyclical peak s
is shown. The starting point for each line is the previous peak in civilian employment ,
not the NBER business cycle peak . The expansion of the 1990s is shown separately
because it too was described as a jobless recovery .
Figure I . Employment and the Business Cycl e
quarters after previous pea k
Source : Department of Labor, Bureau of Labor Statistics .
The chart makes clear that employment in the current economic expansion ha s
recovered more slowly than has been the case in prior economic upswings . It also shows
that the labor market was slower than usual to recover following the 1990 economi c
contraction .
It is unclear why the labor market was so slow to recover from the 1990 economi c
contraction. Some have pointed to the relative mildness of that contraction, and to th e
fact that job losses were widespread, and included many white collar jobs and jobs in th e
104
OO
tl 10 1
i0v
900
2
	
3
	
4
	
5
	
6
	
7
	
8
	
9
	
10
	
11
	
12
	
13
	
14
	
15
	
16
CRS-4
finance, insurance, and real estate industry . 3 It has also been suggested that productivity
growth may have played a role . Productivity growth briefly surged in 1992, which may
have led policymakers to underestimate the economic growth rate that would be require d
to reduce unemployment . 4
The quantity of goods and services produced can increase either by employing more
labor or by increasing the productivity of the labor that is employed . In the most recent
expansion, it would appear that much of the growth in output since the previous peak ca n
be explained by increasing productivity rather than through an increasing labor force . It
may be that the increasing productivity has also played a role in the sluggish recovery of
the labor market in the current expansion .
Why is Employment Slow to Recover ?
Although it is typical for employment growth to lag overall economic growth in the
early stages of an expansion, the Iag is longer than usual in the current upswing . One
explanation for the longer lag hinges on the relationship between employment and
productivity growth .
The level of employment at any time is determined by the supply of and demand for
labor. On the supply side are individuals with different skills and abilities looking for
work. On the demand side are firms looking for workers with the specific skills the y
require to produce goods and services . Jobseekers are assumed to have a minimum
salary, in economics jargon their "reservation wage," they are willing to accept. Unti l
they get an offer that satisfies this minimum they will continue searching . '
The wage a film is willing to pay depends, in part, on worker productivity. An
increase in productivity is likely to lead to an increase in the wages offered by employers .
Other things being equal, a higher wage will lead to an increase in employment becaus e
a greater number of jobseekers will be able to satisfy their reservation wage .
This implies an asymmetry in that employers are aware of the increase i n
productivity and that jobseekers are not . If there ever is such a disparity, it seems unlikely
to persist . Eventually, workers and jobseekers could be expected to perceive the increas e
in productivity and consequently raise their reservation wage . Any employment effect
resulting from a one-time increase in productivity growth would thus be likely to b e
temporary.
This is, in the view of some analysts, what happened in the late 1990s . More than
a few economists were surprised that, during the expansion of the 1990s, bot h
unemployment and inflation rates remained low by recent historical standards . It had
3 Jennifer M. Gardner, "The 1990-91 recession : how bad was the labormarket?," Monthly Labor
Review, June 1994, pp. 3-11 .
Robert J . Gordon, "The Jobless Recovery : Does It Signal a New Era of Productivity Le d
Growth?," Brookings Papers on Economic Activity, 1 :1993, pp . 271-316 .
Bharat Trehan, "Productivity Shocks and the Unemployment Rate," Federal Reserve Bank of
San Francisco Economic Review, 2003, pp . 13-27 .
CRS- 5
been believed that an unemployment rate much below 6% was inconsistent with falling ,
or even stable, rates of inflation.
There was one explanation for the concurrently low rates of inflation and
unemployment of the second half of the 1990s that many found convincing . Beginning
in 1995, the growth rate of productivity accelerated . 6 That was unusual at that stage of
an economic expansion and thus unexpected . If workers and jobseekers were slow t o
recognize that productivity growth had accelerated they would also be slow to raise thei r
wage demands to reflect their increased contribution to the production of goods an d
services .
If firms noticed the increase in productivity before workers did, then the demand for
labor might rise in advance of the wage demands of workers . In this way, unemployment
might fall without any upward pressure on wages . That seems to be what happened in th e
latter stages of the 1990s economic expansion .
But it may be unrealistic to assume that such an asymmetry in the perceptions o f
firms and jobseekers can persist . Sooner or later workers are likely to become aware o f
the increase in productivity and increase their wage demands to reflect that increase . To
the extent that wage demands increase, the rate of hiring would tend to slow . If that i s
what is happening now, it may be retarding growth in employment just as the economy
is in the early stages of expansion .
Another factor that may explain the apparently slow recovery of employment is tha t
the peak level of employment reached at the end of the 1990s expansion may have been
higher than would have been the ease in the absence of the acceleration of productivity .
Figure 1 shows the recent history of the civilian unemployment rate .
Up until the mid 1990s, many economists estimated that the lowest th e
unemployment rate could go without risking an acceleration of inflation was about 5 .5%.'
But the unemployment rate went well below that level in the late 1990s without any
appreciable rise in the inflation rate . This is also known as the non-accelerating inflation
rate of unemployment, or NAIRU . Because of the acceleration in productivity whic h
began in 1995, there may have been a temporary decline in the unemployment rate below
which inflation might be expected to accelerate . But, if that decline was only temporary,
then some of the slack in the job market may have been reduced by a rebound in th e
NAIRU, narrowing the gap between actual and "full" employment .
6 See: CRS Report RL31428, Productivity Growth : Recent Trends and Future Prospects, by
Brian W . Cashell .
CRS Report RL30391, Inflation and Unemployment : What is the Connection?, by Brian W .
Cashell .
CRS-6
Figure 2 . Civilian Unemployment Rat e
3
1980
	
1982
	
1984
	
1986
	
1988
	
1930
	
1992
	
1994
	
1996
	
199B
	
2000
	
200 2
Source : Department of Labor, Bureau of Labor Statistics .
Conclusions
Economic expansions have many characteristics in common, but the current one i s
notable for the relatively slow recovery in the labor market . One reason for that may b e
that the preceding contraction was relatively mild . The unemployment rate so far has
remained well below the level reached in each of the two previous contractions .
The acceleration in productivity growth observed in the second half of the 1990s ma y
also be responsible . The increase in productivity growth may have temporarily reduced
the unemployment rate below which inflation might be expected to accelerate . If that is
true, and if that rate has since rebounded, then it is unlikely that the current expansion will
be able to sustain the combination of low unemployment and inflation that characterize d
the latter stages of the 1990s economic expansion .


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Employment Growth in the Current Economic Expansion

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