Thursday, August 4, 2011

Recovery from recession - Long term view

The post recession recovery has not been successful in creating enough jobs. WSJ has reported the following about the recovery scenario.
Over the past 10 years:
  • The U.S. economy's output of goods and services has expanded 19%.
  • Nonfinancial corporate profits have risen 85%.
  • The labor force has grown by 10.1 million.
  • But the number of private-sector jobs has fallen by nearly two million.
  • And the percentage of American adults at work has dropped to 58.2%, a low not seen since 1983. 

The article states that the problem with recovery has been attributed to the following reasons.
  • Productivity has increased with lessons learned from 1990-91, and the 2001 recession. The result has been that to get the same level of output, you need lesser amount of people. Moreover by the end of 2009, U.S. economy's output had fallen by 4.5% and the labor force fell by 8.3%
  • Firms are unsure about the demand owing to fear and slower recovery after recession. This demand uncertainty has been partly fueled by slower growth. 
  • Labor Hoarding, i.e. the approach of hiring more than required has ended. It essentially refers to not laying off redundant workers during a recession to ensure that skilled and experienced workers are available after the recession. Firms now are focusing on flexibility in work force. Moreover production lines can be stopped and resumed quickly.
The bottom line is that innovation in processes and technology has resulted in increased per capita output of the firm. Although in the short run, recovery has been slower, in the long run this is bound to create a huge cushion for firms and well and those currently employed with them. If in the deep recession of the 1970s U.S. economies output fell by 5% with labor force falling by 2.5%, in the next downturn it is going to be far lower. A slower growth has meant more stability, which will reap dividends for all in future.