Shift to service-driven economy delays job recovery
It feels like it’s taking forever for the U.S. economy to add back the jobs it lost in the Great Recession. In historical terms, that’s true, and new research suggests it’s partly because of a half-century shift from manufacturing to services as the engine of the economy.
Even with the relatively good news yesterday that the economy added 165,000 net jobs in April, the United States is 2.5 million jobs short of where it was when the recession officially began in December 2007. It has been 45 months since the recession ended.
This recession was the deepest one since the Great Depression. But slow job recoveries have become a defining trend of the past three recessions. It took the economy 37 months from the end of the 2001 recession to add back the jobs it lost. For the recession before that, which ended in 1991, it took 23 months. Yet about two decades earlier, it took just nine months to regain the jobs lost in the recession that ended in 1975 and six months for the one that ended in 1970.
New research by economists Martha Olney, at the University of California at Berkeley, and Aaron Pacitti, at Siena College, suggests that the economy is slower to recover jobs today because it has grown far more dependent on people doing things as opposed to making things.
Goods production supplied about three-fifths of economic output in 1950 and about half of its jobs. By 2010, growth in the service sector has accounted for two-thirds of output and seven out of every 10 jobs.
Olney and Pacitti estimate that because of that shift, the march back to pre-recession employment levels will last about a year longer than it would have a half-century ago. They base their analysis on a study of 50 years of U.S. recessions, along with 30 years of data on how states – with different economic compositions – rebounded from their own recessions.
The way Olney explains it to her students: There comes a point, after an economy has been contracting, when factory owners start to anticipate that better times are around the corner. So they ramp up output, which puts people back to work, pumps more money into the economy and creates a virtuous cycle of output, employment and growth. It’s a different story for service providers. They don’t anticipate new demand; they wait for it to appear, then hire, she said.