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Understanding the Labor Market in a Deflationary Economic Context. Paul E. Harrington Center for Labor Market Studies Northeastern University Boston, Massachusetts January 2009. A Thumbnail Sketch of the Economic Crisis. An Economy out of Balance Total GDP 2000 to 2007 $92.5 Trillion

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understanding the labor market in a deflationary economic context

Understanding the Labor Market in a Deflationary Economic Context

Paul E. Harrington

Center for Labor Market Studies

Northeastern University

Boston, Massachusetts

January 2009

a thumbnail sketch of the economic crisis

A Thumbnail Sketch of the Economic Crisis

An Economy out of Balance

Total GDP 2000 to 2007 $92.5 Trillion

Total Purchases of G&S $97.0 Trillion

Difference -$4.5 Trillion

how did we purchase more than we produced

How did we purchase more than we produced?

Purchased Goods from Overseas

U.S. Balance of Trade Deficit increased by about $4.5 Trillion

how did we pay for excess consumption

How did we pay for excess consumption?

Household debt doubled by $6.8 trillion

Between 2000 and 2005 average home price doubled

Almost half of this debt secured by mortgages

Savings rate fell to zero

a housing bubble market values fluctuate debt is forever

A Housing Bubble “Market Values Fluctuate: Debt is Forever”

Unlike equity bubbles housing bubbles quickly convert to spending

Banks “make your home work for you”

Out of $6.8 Trillion increase in debt, $4.2 Trillion NOT spent on housing

Consumer electronics/autos/trucks

who lent us the money

Who lent us the money?

China, oil producers including Russia and Saudi Arabia

These nations purchased U.S. Treasuries-safe and secure

Held assets in U.S. banks—swelling domestic banking reserves

how did this fuel borrowing and spending
How did this fuel borrowing and spending?
  • Large reserves fueled rapid growth in money supply
  • Fractional reserve lending system meant that growth in reserves resulted in large growth in money supply via the money multiplier –result was low interest rates
federal reserve response

Federal Reserve Response

Fed did nothing

Greenspan: World has entered into a “new economic paradigm (rejection of liquidity preference theory and acceptance of the efficient market theory)

Prices set in asset and housing markets are ‘correct’

fed continued

Fed continued

Absence of inflation over 2000 to 2005 led to fed to inaction

Fed supported rising asset prices

Permitted rapid expansion in money supply and declining real interest rates

Fueled further increases in housing and stock markets (asset inflation)

how did housing bubble burst

How did housing bubble burst?

Mortgage loans made to people with no hope of making payments

Sub-prime

Home equity loans based on assumption of perpetually rising housing prices

Teaser rates

Home values collapse -down 25 Percent since mid 2006

what s different about this downturn

What’s different about this downturn?

Rise in asset values are based on financiers making increasingly risky loans

Banks developed new ways of sell off these risky loans into world markets

CDOs

Credit Default Swaps

Estimated $30 Trillion losses in wealth across the world

problem is now well beyond mortgage backed securities and housing market

Problem is now well beyond mortgage backed securities and housing market

Commercial lending

Credit card lending

Auto lending

All suffering rising default problems

So banking system sharply reduces lending—money multiplier collapses—liquidity trap

financial meltdown has led to deflation

Financial meltdown has led to deflation

Deflation is a downward pressure on prices that sharply reduces the level of output, employment and income

Deflation is a self-reinforcing downward spiral based on future expectations about prices that reflect overall economic conditions

what is the current economic situation
What is the Current Economic Situation?
  • Global Demand for Goods and Services Falling Sharply
  • 4th qtr GDP in Industrialized Nations fell 6 to 7 Percent annual average pace.
  • 1st qtr 2009 GDP is expected to fall at same pace.
asset values continue to decline
Asset Values Continue to Decline
  • Sharp decline in housing values—25 percent decline in mean price level
  • Additional 20 percent decline expected this year
  • Equity assets declined by 50 percent since peak
  • Estimated that about 1/3rd of value of world wealth wiped out last year
  • U.S. wealth value fell by about $11 trillion in 2008
deflationary cycle
Deflationary Cycle
  • Decline in value of assets leads to
  • Increased desire and intensity of savings—depress demand growth
  • Increased savings rate (now over 5%)
  • Decreased consumption (retail sales contracted by 28 % apr in 4th qtr 2008)
  • Corporate profits fall sharply—huge banking sector losses-rise of zombie banks
  • Continuing reductions in consumption make expanding profits next to impossible
gdp falls
…GDP Falls
  • Declines in C+I results in GDP declines
  • Profit declines result in cut-backs in production
  • Lay-offs rise sharply, job vacancies fall sharplhours
  • Accelerating rate of job losses
  • Rising unemployment
  • Sharp reductions in hours of work per week, increase in part-time work for economic reasons
decline accelerates
…Decline Accelerates
  • Employment losses lead to real income declines
  • Households make effort to raise savings rate
  • Expectations of future prices of asset values fall—decrease purchases of assets-further reduces their price
  • Values of housing declines
  • Value of equities declines
  • These paper declines feed back into a new round of cutbacks in the real economy- an adverse feedback loop or deflationary spiral
phases of downturn
Phases of Downturn
  • August 2007- March 2008:market cap of banks insurance companies begins to erode Monthly losses in value average $150 billion (Bear Stearns 3/2008)
  • March to Sept 2008: Losses mounted to $260 billion per month (Lehman bankruptcy 9/2008)
  • September 2008 to January 2009: Losses in value of banks and insurance companies explodes– average decline of $ 660 billion permonth
  • Asset write downs in global finance about $5 trillion
job market developments
Job Market Developments
  • Recession begins in December 2007 Payroll employment declines average 137,000 per month over the period
  • August to November job losses accelerate to 436,000 per month
  • December to February job losses in U.S, average 662,000
  • Expectations of this months reports suggest similarly large
slide21
CES Total Nonfarm Employment by Region, Trough to Peak (Q2 2003 to Q4 2007), Seasonally Adjusted, in thousands
slide22
CES Total Nonfarm Employment by Region, Peak to Present (Q4 2007 to Q4 2008), Seasonally Adjusted, in thousands
slide24
CES Heartland Region Supersector Employment Peak to Trough (Q1 2001 to Q2 2003), Seasonally Adjusted, in thousands
slide25
CES Heartland Region Supersector Employment Trough to Peak (Q2 2003 to Q4 2007), Seasonally Adjusted, in thousands
slide26
CES Heartland Region Supersector Employment Peak to Present (Q4 2007 to Q4 2008), Seasonally Adjusted, in thousands
ces heartland region supersector employment q1 2001 to q4 2008 seasonally adjusted in thousands
CES Heartland Region Supersector Employment Q1 2001 to Q4 2008, Seasonally Adjusted, in thousands
slide28

Changes in Nonfarm Industry Employment in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide32

Changes in Nonfarm Industry Employment in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide33

Changes in Occupation Employment in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide34

Changes in Nonfarm Industry Employment in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide35

Changes in Occupation Employment in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide36

Changes in Occupation Employment in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide37

Changes in Employment by Gender in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide38

Changes in Employment by Gender in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide39

Changes in Employment by Gender in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide40

Changes in Unemployment by Gender in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide41

Changes in Unemployment by Gender in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide42

Changes in Unemployment by Gender in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide43

Changes in Labor Force by Gender in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide44

Changes in Labor Force by Gender in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide45

Changes in Labor Force by Gender in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide46

Changes in Employment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide47

Changes in Employment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide48

Changes in Employment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide49

Changes in Unemployment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide50

Changes in Unemployment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide51

Changes in Unemployment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide52

Changes in Labor Force by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide53

Changes in Labor Force by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide54

Changes in Labor Force by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide55

Changes in Male Employment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide56

Changes in Male Employment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide57

Changes in Male Employment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide58

Changes in Male Unemployment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide59

Changes in Male Unemployment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide60

Changes in Male Unemployment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide61

Changes in Male Labor Force by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide62

Changes in Male Labor Force by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide63

Changes in Male Labor Force by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide64

Changes in Female Employment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide65

Changes in Female Employment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide66

Changes in Female Employment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide67

Changes in Female Unemployment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide68

Changes in Female Unemployment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide69

Changes in Female Unemployment by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide70

Changes in Female Labor Force by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide71

Changes in Female Labor Force by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide72

Changes in Female Labor Force by Age in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide73

Changes in Employment by Race in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide74

Changes in Employment by Race in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide75

Changes in Employment by Race in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide76

Changes in Unemployment by Race in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide77

Changes in Unemployment by Race in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide78

Changes in Unemployment by Race in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide79

Changes in Labor Force by Race in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide80

Changes in Labor Force by Race in the Heartland Region, Civilian Workers Age 16+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide81

Changes in Labor Force by Race in the Heartland Region, Civilian Workers Age 16+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide82

Changes in Employment by Education in the Heartland Region, Civilian Workers Age 25+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide83

Changes in Employment by Education in the Heartland Region, Civilian Workers Age 25+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide84

Changes in Employment by Education in the Heartland Region, Civilian Workers Age 25+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide85

Changes in Unemployment by Education in the Heartland Region, Civilian Workers Age 25+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide86

Changes in Unemployment by Education in the Heartland Region, Civilian Workers Age 25+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide87

Changes in Unemployment by Education in the Heartland Region, Civilian Workers Age 25+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide88

Changes in Labor Force by Education in the Heartland Region, Civilian Workers Age 25+, Dec 2006-Jan 2007 Avg to Dec 2007-Jan 2008 Avg (Not Seasonally Adjusted)

slide89

Changes in Labor Force by Education in the Heartland Region, Civilian Workers Age 25+, Dec 2007-Jan 2008 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide90

Changes in Labor Force by Education in the Heartland Region, Civilian Workers Age 25+, Dec 2006-Jan 2007 Avg to Dec 2008-Jan 2009 Avg (Not Seasonally Adjusted)

slide96
Who Lost Jobs? Age, Gender, Race, Educational and Occupational Characteristics of 2008 Employment Losses in the Nation
slide106
Distribution of Employment Losses Among Persons Aged 25+, by Educational Attainment, December 2007 to December 2008
slide126
Trends in the Number of Unemployed Persons (Experienced Labor Force) Aged 16+ in the U.S. (Not Seasonally Adjusted)
slide142
Changes in the Level and Rate of Job Openings in the U.S., Q4 2007 to Oct-Nov Average 2008, Seasonally Adjusted (Levels in Thousands)
slide143
Changes in the Level of Job Openings in the U.S. by Region, Q4 2007 to Oct-Nov Average 2008, Seasonally Adjusted (Levels in Thousands)
slide145
Changes in the Level and Rate of Hires in the U.S., Q4 2007 to Oct-Nov Average 2008, Seasonally Adjusted (Levels in Thousands)
slide146
Changes in the Level of Hires in the U.S. by Region, Q4 2007 to Oct-Nov Average 2008, Seasonally Adjusted (Levels in Thousands)
slide148
Changes in the Level and Rate of Separations in the U.S., Q4 2007 to Oct-Nov Average 2008, Seasonally Adjusted (Levels in Thousands)
slide149
Changes in the Level of Separations in the U.S. by Region, Q4 2007 to Oct-Nov Average 2008, Seasonally Adjusted (Levels in Thousands)
slide151
Changes in the Level and Rate of Quits in the U.S., Q4 2007 to Oct-Nov Average 2008, Seasonally Adjusted (Levels in Thousands )
slide152
Changes in the Level of Quits in the U.S. by Region, Q4 2007 to Oct-Nov Average 2008, Seasonally Adjusted (Levels in Thousands )
slide154
Changes in the Level of Net Hires and Separations in the U.S., Q4 2007 to Oct-Nov Average 2008, Seasonally Adjusted (Levels in Thousands )
slide155

Changes in the Level of Net Hires and Separations in the U.S. by Region, Q4 2007 to Oct-Nov Average 2008, Seasonally Adjusted(Levels in Thousands )

a thumbnail sketch of the economic crisis1

A Thumbnail Sketch of the Economic Crisis

An Economy out of Balance

Total GDP 2000 to 2007 $92.5 Trillion

Total Purchases of G&S $97.0 Trillion

Difference -$4.5 Trillion

how did we purchase more than we produced1

How did we purchase more than we produced?

Purchased Goods from Overseas

U.S. Balance of Trade Deficit increased by about $4.5 Trillion

how did we pay for excess consumption1

How did we pay for excess consumption?

Household debt doubled by $6.8 trillion

Between 2000 and 2005 average home price doubled

Almost half of this debt secured by mortgages

Savings rate fell to zero

a housing bubble market values fluctuate debt is forever1

A Housing Bubble “Market Values Fluctuate: Debt is Forever”

Unlike equity bubbles housing bubbles quickly convert to spending

Banks “make your home work for you”

Out of $6.8 Trillion increase in debt, $4.2 Trillion NOT spent on housing

Consumer electronics/autos/trucks

who lent us the money1

Who lent us the money?

China, oil producers including Russia and Saudi Arabia

These nations purchased U.S. Treasuries-safe and secure

Held assets in U.S. banks—swelling domestic banking reserves

how did this fuel borrowing and spending1
How did this fuel borrowing and spending?
  • Large reserves fueled rapid growth in money supply
  • Fractional reserve lending system meant that growth in reserves resulted in large growth in money supply via the money multiplier –result was low interest rates
federal reserve response1

Federal Reserve Response

Fed did nothing

Greenspan: World has entered into a “new economic paradigm (rejection of liquidity preference theory and acceptance of the efficient market theory)

Prices set in asset and housing markets are ‘correct’

fed continued1

Fed continued

Absence of inflation over 2000 to 2005 led to fed to inaction

Fed supported rising asset prices

Permitted rapid expansion in money supply and declining real interest rates

Fueled further increases in housing and stock markets (asset inflation)

what s different about this downturn1

What’s different about this downturn?

Rise in asset values are based on financiers making increasingly risky loans

Banks developed new ways of sell off these risky loans into world markets

CDOs

Credit Default Swaps

Estimated $30 Trillion losses in wealth across the world

how did housing bubble burst1

How did housing bubble burst?

Mortgage loans made to people with no hope of making payments

Sub-prime

Home equity loans based on assumption of perpetually rising housing prices

Teaser rates

Home values collapse -down 25 Percent since mid 2006

problem is now well beyond mortgage backed securities and housing market1

Problem is now well beyond mortgage backed securities and housing market

Commercial lending

Credit card lending

Auto lending

All suffering rising default problems

So banking system sharply reduces lending—money multiplier collapses—liquidity trap

financial meltdown has led to deflation1

Financial meltdown has led to deflation

Deflation is a downward pressure on prices that sharply reduces the level of output, employment and income

Deflation is a self-reinforcing downward spiral based on future expectations about prices that reflect overall economic conditions