Why hiring languishes even as economy gains

Economists wonder if something "structural" has changed in the economy that makes recoveries relatively weaker, producing fewer jobs. A new study published by the Federal Reserve Bank of New York answers, "Yes."

Reason No. 1, argue study authors Erica Groshen and Simon Potter, is that management may have become tougher in layoff and hiring policies. Managers lay off both blue- and white-collar workers quickly and are not as prone to hire them back again. Thus, new job growth may increasingly depend on the rise of new firms and industries, and less on rehiring at older firms.

Another factor, in this case, was the mildness of this recession. The researchers say that stimulative policies such as interest-rate and tax cuts helped keep the recession short - only nine months long. Low-interest rates meant that the housing, consumer durables, and auto industries were able to maintain strong sales throughout the slump. Thus they had little room to bounce back in the recovery, as would be normal.

To many economists, a key to the current slackness in job creation is productivity gains. Employers are getting more output from the workers they already have, and thus need to hire fewer new workers. Workers' output per hour usually falters in a recession. That didn't happen in 2001. During recovery, productivity generally accelerates, but this time the pace appears very strong.

Job growth is also held back, some say, by the massive $500 billion-plus deficit in international trade.

"There's a migration of jobs abroad where wages are so much cheaper," says Dr. Zarnowitz. The Bush administration, to a degree, has taken up this explanation for job loss, especially in manufacturing. Manufacturing jobs accounted for 22 percent of the US total in 1970, but only 10 percent of all jobs today.

The economy's growing orientation toward services: This can soften the blow of recessions, as people continue getting their hair done and seeing healthcare providers in bad times. But service industries don't tend to hire en masse during a recovery, either.

Corporate executives appear more likely than in the past to lay off employees permanently, rather than hoarding them temporarily while awaiting a snap-back in sales. "We have a corporate culture of aggressive cost-cutting to increase profits, even in a business slowdown," says Jared Bernstein, an economist at the Economic Policy Institute, a liberal-leaning research group in Washington.

Mr. Bernstein suggests another culprit: poor economic policy by the White House.

The Bush tax cuts of $3 trillion over 10 years were badly designed, he argues, because they gave most of the benefits to the well-to-do who are less likely to spend it quickly than lower-income people.