Archive for January 20th, 2010

Employment recoveries from previous recessions

January 20, 2010

Boston Fed President, Eric Rosengren in his speech looks at how employment shaped in previous recoveries from recessions.

First a general take:

  • As shown in Figure 1, this is not unusual for the first year of a recovery. Consider the following logic.  The difference between real GDP and real final sales is the change in inventories. In the first year of the recovery from the four previous recessions, real GDP grew faster than real final sales.  This shows how the normalizing of inventories has been an important source of economic growth in the early stages of most recoveries. 
  • Figure 2 shows that the past two recoveries did not feature job growth in the first year of the recovery, in sharp contrast to the recoveries of the 1970s and 1980s.  The past two recessions had positive economic growth in the first year of the recovery, but it was not rapid enough to generate job growth.  In contrast, in the recoveries in the 1970s and 1980s, growth was sufficient to yield employment growth in the first year of the recovery.
  • Figure 3 illustrates another pattern typical of recoveries.  While there has been a longstanding downward trend in the average weekly hours of production workers, it is common for average hours to decline more steeply during a recession.  Note that in prolonged recessions, where the shading is the widest, average weekly hours decline more significantly – as workers are placed on shortened work weeks. 
  • Another harbinger of a recovery in employment is growth in temporary services.  Firms often extend work weeks and hire temporary workers before committing to hiring permanent workers.  As Figure 4 highlights, the use of temporary workers fell quite dramatically during the recession, but has been rebounding more recently.

Some industry patterns:

  • Figure 9 shows four industries that have tended to perform well in the first year of a recovery – professional and business services, education and health services, leisure and hospitality, and to a lesser extent government.  The first three are areas that have increased their share of total employment, and all have tended to be less sensitive to economic downturns.  

    While it is quite possible that these areas will grow in the initial stages of this recovery, that growth is likely to be restrained by various factors.  In education and health services, there is the matter of the significant retrenchment in college endowments, and uncertainty as national health reform proposals are debated in Washington.

  • Figure 10 highlights industries that have had more mixed results in the first year of a recovery and are uncertain this time as well.  While construction employment will be restrained by low housing prices and elevated foreclosures – and commercial construction employment is restrained in many areas by falling commercial real estate prices and high vacancy rates – employment levels in these sectors have experienced such significant declines that we may still see some rebound. 

Read the speech for nice graphs and a better understanding of the issues.

Benefits and Limitations of Taylor rule

January 20, 2010

Donald Kohn has a nice oldish speech on Taylor rules. The speech was given in this Dallas Fed conference in the honor of John Taylor.

3 benefits:

  • The first benefit of looking at a simple rule like John’s is that it can provide a useful benchmark for policymakers.  It relates policy setting systematically to the state of the economy in a way that, over time, will produce reasonably good outcomes on average.
  • A second benefit of simple rules is that they help financial market participants form a baseline for expectations regarding the future course of monetary policy.
  • A third benefit is that simple rules can be helpful in the central bank’s communication with the general public.  Such an understanding is important for the transmission mechanism of monetary policy

4 limitations:

  • The first limitation is that the use of a Taylor rule requires that a single measure of inflation be used to obtain the rule prescriptions.  The price index used by John in the Carnegie Rochester paper was the GDP price deflator.  Other researchers have used the inflation measure based on the consumer price index (CPI).  Over the past fifteen years, the Federal Reserve has emphasized the inflation rate as measured by changes in the price index for personal consumption expenditures (PCE). 
  • Second, the implementation of the Taylor rule and other related rules requires determining the level of the equilibrium real interest rate and the level of potential output; neither of them are observable variables, and both must be inferred from other information. 
  • The third limitation of using simple rules for monetary policymaking stems from the fact that, by their nature, simple rules involve only a small number of variables.  However, the state of a complex economy like that of the United States cannot be fully captured by any small set of summary statistics.
  • The final limitation I want to highlight is that simple policy rules may not capture risk-management considerations.  In some circumstances, the risks to the outlook or the perceived costs of missing an objective on a particular side may be sufficiently skewed that policymakers will choose to respond by adjusting policy in a way that would not be justified solely by the current state of the economy or the modal outlook for output and inflation gaps.    

He then looks at these limitations and applies it on policy real time.  He shows how applying the Taylor rules in real time leads to difficulties. Pretty much what Bernanke said in his recent speech.

Productivity curve in India is j-shaped

January 20, 2010

Danish A. Hashim, Ajay Kumar and Arvind Virmani have written a nice paper looking at growth of productivity in Indian economy. It is part of Finance Ministry Working paper series.

The paper says productivity in Indian economy has followed a J-shaped curve. The reforms in 1990s led first to a decline in productivity because of initial adjustments and surplus capacities. The productivity then picks up in 2000s.

Majority of the studies on the impact the economic reforms on productivity growth in Indian manufacturing have found that productivity growth in the post reform period of 1990s declined as compared to its level during 1980s. Poor capacity utilization during the 1990s was attributed as one of the main reasons. However, even after correction for capacity utilization, Goldar and Kumari, 2003 did not find trace of productivity acceleration in the 1990s. They argued for a case of time lag between reforms and its impact on productivity growth and hence felt that productivity could improve in later years. The present study endeavors to see if productivity growth indeed improved in later years when the issue of capacity utilization also eased.


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