Jobless Recovery

Prompted by Planet Money over at NPR, I read Federal Reserve Chairman Ben Bernanke's testimony to congress yesterday, and I think that I have an understanding of how a jobless recovery works. The following scenario lays a version of it out, mainly so that I could see my own understanding in front of me, to see if it made any sense. But in effect, a Jobless Recovery works on the difference between an economic recovery, where activity goes from falling to rising, and mainly concerns itself with business activity, and what you might call an economic restoration, where economic activity returns to a set prior level.

Okay. I own Aaron's Wonderful Widgets. Not surprisingly, we make widgets. Before the downturn, I had a small group of employees: Jack, Jill, Tom, Dick and Harry on the assembly line, Jane in the office and Sally sharing sales duties with me.

Jack, Jill, Tom, Dick and Harry, as my crack Widget Assembly Team, could crank out about one widget an hour. So with five people, I could produce 200 widgets in a week. Between regular sales and irregular upticks in demand, say I could reliably sell 198 widgets in a week. Instead of cutting Harry (the most junior assembler) back a couple hours a week, I kept him on at full hours. The slight overproduction was acceptable, as it meant that I could manage to supply the upticks in widget demand, and not lose the sale to a competitor. Over time, an inventory of unsold widgets is developed, about a hundred. A few of these are in my warehouse, the widget distributors have some, and the rest are spread throughout the network of widget retailers.

Cue the economic disaster. Widget sales fall of a cliff, like everything else. Over the course of several weeks, I find that regular demand for widgets is down to 85 a week, and the upticks are pretty much gone. Now that unsold inventory turns around to bite me. Before, that surplus was about half the weekly demand, meaning that a week's halt to production would eat all the surplus, and leave half my customers begging. Now, a week's halt to production wouldn't even clear the whole surplus. So I lay off Harry, Dick and Tom, to cut my production down to 80 units a week. Since my sales are less than half of what there were before, Sally loses her sales job, as I can now handle the load myself. Even though my weekly production now doesn't meet demand, the unsold inventory means that it's going to take a few months to before I need to increase production.

Once the unsold inventory is gone, I now need to increase production. But I only need an extra five widgets a week, over what I'm already making. So Jack and Jill each put in a little overtime to make up the difference. Over a year, my demand for widgets goes up by about 6 percent. Now I need to make 90 widgets a week to keep up with demand. It's still better for me to pay Jack and Jill 5 hours of overtime a week than it would be to hire Tom, Dick or Harry back.

But the government looks at the numbers, and says "Aha! AWW's production is up 6% over the past year - the business is recovering!" and puts a check in the "Win" column, even though Tom, Dick, Harry and Sally's jobs are still gone. On top of this, there's nothing for Mike, who's just entering the workforce. Back when I was routinely selling an average of nearly 200 widgets a week, a 6% could have given me a reason to bring him on part time, in some capacity. But now, that 6% doesn't eve restore the cuts I made before, and Mike goes into the ranks of the unemployed, rather than into an entry-level job.

So even though the business outlook is "recovering" it's not doing so in a way that drives any new employment, or even restores the jobs that were previously lost. I think that this explains it. But, not being an economist, I could be way off (wouldn't be the first time). But I think that I have a basic grasp on how the business climate adapting to a long-term drop in overall spending and consumption can be a statistical recovery, yet still be an employment catastrophe.