Measuring (Most of) the Slack in the Labor Market

October 09, 2014

A recent Economic Synopses essay shows that the two largest underperforming sectors in the economy—construction and manufacturing—have had very different experiences recovering from the Great Recession compared to recovering from previous recessions.

Carlos Garriga, a research officer and economist at the Federal Reserve Bank of St. Louis, examined the slack in the labor market by comparing the current recovery with previous recoveries at the sector level. He noted, “If individual sectors are recovering at slower rates than in the past, it is reasonable to believe that these sectors are sources of slack. Alternatively, if individual sectors are recovering more quickly than in the past, there may not be much slack in these sectors.”

Garriga examined total hours of nonfarm payroll as reported by the Bureau of Labor Statistics. He focused on the construction and manufacturing sectors due to their underperformance in terms of both payroll employment and hours worked:

  • Manufacturing lost more than 2 million jobs (14.7 percent of the sector) during the recession. While manufacturing employment has improved since the recession, it remained 11.8 percent below its December 2007 level as of June 2014.
  • Construction lost almost 1.5 million jobs (19.8 percent) during the recession, and its employment level remained essentially unchanged since the end of the recession.

Garriga examined overall trends in total hours in both sectors since 1990 and found that the manufacturing sector has experienced a declining secular trend, while the construction sector has had a large positive trend. He also compared the current recovery of each sector with its corresponding overall trend line as well as where total hours would be using the recovery rates from the early 1990s and the early 2000s:

  • The current recovery in manufacturing has been stronger than after the previous two recoveries. The current number of hours worked in manufacturing is 6 percent above trend. If the current recovery followed the same growth rate as either prior recovery, hours worked would be either 2 percent above trend (early 1990s growth rate) or 5 percent below trend (early 2000s growth rate).
  • The recovery for the construction sector has been very weak, with the sector 11 percent below the historical trend. Using the recovery rates from the previous two recessions, the construction sector would be only 3 percent to 6 percent below trend.

He concluded, “Compared with previous recessions, the manufacturing sector does not show much slack. The construction sector, on the other hand, is below potential. Using the most optimistic scenario for the recovery in construction, total private sector hours are about 0.7 percent below potential.”

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