Eric Rosengren, President of the Federal Reserve Bank of Boston, recently delivered a speech where he presented further evidence that the problems in the labor market are more the result of weak aggregate demand than structural factors:
[I]n each of the three previous recessions there was a decline [in employment] of 5 percent or more in no more than two industry categories – as the figure shows – with many industries experiencing little or no net job loss over the course of the recession. Structural hifts acrossindustries are not uncommon in recessions – and also, some structural dislocation seems inevitable as it will always take some time for capital and labor to flow to those industries with the greatest opportunities.
In rather stark contrast, the most recent recession is far less a reflection of dislocation in a few industries but rather reflects a general decline in almost all industries. As the chart [below] shows, in this recession there has been a peak to trough loss of employment of 5 percent or greater in construction, manufacturing, retail trade, wholesale trade, transportation, information technology, financial activities, and professional and business services. To me, this does not suggest that the driver is structural change in the economy increasing job mismatches – although no doubt some of that exists – but instead I see here a widespread decline in demand across most industries.
With this evidence from the labor markets in mind take a look at this figure on final sales of domestic product, a measure of aggregate demand: (Click on figure to enlarge.)
This figure shows that the growth rate of AD remains low and by implication the level of AD is also well below trend. After examining these graphs it is hard not to think insufficient aggregate spending is a serious problem now facing the economy. Yes, there are structural problems but they are only being made worse by the lack of appropriate monetary policy actions to stabilize AD.
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