One of the big questions Peter Coy and I take up in our cover story on the recent “Obama recovery” is why unemployment has been falling faster than growth would suggest it should. Economists have several theories: Maybe the economy is growing faster than we realize and future revisions will make this clear; maybe it’s a statistical aberration and the unemployment rate will begin to rise again; or maybe the pace of growth of workers’ productivity has slowed, which would cause employers to hire more workers but hurt the country’s overall economic competitiveness. “Everyone has their favored explanation,” Peter Orszag, Obama’s first budget director, told us, “but no one knows yet which is right.”
On Monday, Federal Reserve Chairman Ben Bernanke provided his own explanation in a speech to the National Association for Business Economics’s annual conference. While noting that a wide range of indicators suggests the job market really is (finally!) improving, Bernanke conceded that “we cannot yet be sure that the recent pace of improvement in the labor market will be sustained.”
Then he addressed the question of why the jobs numbers might be outpacing growth. The deviation, he said, “may reflect, at least in part, a reversal of the unusually large layoffs that occurred during late 2008 and over 2009. To the extent that this reversal has been completed, further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.”
Bernanke was referring to the last time the unemployment/growth numbers deviated in a way economists couldn’t readily explain. That was in 2008-09, when unemployment rose much faster than growth suggested it should—the opposite of what’s happening now. Several Obama administration officials that we spoke to for our story believe unemployment shot up so high simply because of fear: Employers recognized they were in the midst of an historic crisis and pulled back further than they otherwise might have. The corollary to this view is that employers now recognize that the crisis has passed and thus are hiring at a faster rate than normal to compensate for having pulled back so far three years ago. That’s not an unpleasant scenario if you’re in the White House.
Bernanke seems to be endorsing this view, but with one unhappy qualifier: that this “reversal” may be complete. If that’s the case, it would mean the recent drop in unemployment won’t continue, at least not without further help from the government to prop up demand. And that, as anyone in the White House can testify—and did, to the two of us—is not an easy thing to bring about.