Atif Mian and Amir Sufi write: “Jobless Recovery in one Chart”. They borrow this chart from Ed Leamer:

And write:

On the horizontal axis is the total amount of hours worked. On the vertical axis is the total output of the business sector. Leamer plots hours and output since WWII. Before 2001, we saw a steady expansion of both output and hours–we move in the northeast direction of the chart. Recessions are times when we move to the southwest of the chart — hours and output drop. Recoveries should be times when we move back to the northeast–output and hours increase. That’s exactly what happened after all post WWII recessions, until 2001. In 2001 and in the Great Recession, the recovery moves us straight north in the chart, not to the northeast. Output recovers, but jobs don’t.

That´s right. But why? I think monetary policy, as practiced during the recoveries, helps explain much of the jobless recovery after the 2001 recession and the job loss recovery following the 2007-08 recession.

The panel below shows what happened to nominal spending (NGDP or Aggregate Demand), real output (RGDP) and inflation during the 18 quarters from the start of the recovery following the 1981-82, 1990-91, 2001 and 2007-09 recessions.

The Fed controls nominal spending pretty closely. The recovery from the 1981-82 recession (that marked the end of the ‘Great Inflation’ years) was exuberant or robust and note that there was no loss of inflation control.

The recovery after the 1990-91 recession was much more subdued. Granted the fall had also been much milder. There was talk of the Fed engaging in ‘opportunistic disinflation’. The fact is that nominal spending growth didn´t rise immediately and when it did it was restrained. Inflation came down a few notches.

The recovery from the 2001 recession was surprising at the time, being famously called ‘jobless recovery’. Note that nominal spending growth only rises after inflation had fallen to undesirable levels, with the Fed talking about the risk of deflation!

And the last chart shows that not only the drop this time around was very deep but there´s no compensating spending growth that would be required to bring unemployment down. This time it´s more of a ‘job loss’ non recovery. And the Fed seems completely satisfied with that state of affairs. If not it would be fully engaged in getting spending up, just as it did in 2003 when there was a whiff of deflation.

Instead we see the opposite, with the discussion going the way of an earlier tightening so as to avoid the onset of financial instability!