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Cyclical asymmetry in the labor market

Slow but steady improvements versus sharp declines

Have you ever spent hours on the beach meticulously building the perfect sandcastle, only for a bully to waltz by and kick it down in an instant? A similar phenomenon occurs in the labor market, as even the shortest recessions can undo years of progress made during an expansion. The unemployment rate tends to fall only gradually during economic expansions but rise sharply during recessions. This mismatch of slow declines versus sharp spikes is known as “cyclical asymmetry.”

This cyclical asymmetry of the unemployment rate derives in part from the fact that it takes much longer to create jobs than to destroy them. We can think of the labor market as a market for productive relationships between employers and employees. These relationships are a durable form of capital: They provide long-term economic benefits over time for firms and workers alike. It can take a while to build these relationships but only a short time to terminate them.

Consider the drawn-out process it takes to match employers and employees. First of all, both parties much search for and identify potential matches. Then, employers usually put candidates through a lengthy hiring process before making any offers. And even once the employee is hired, it takes time to establish a working relationship. Hence, job creation tends to be slow, even when the economy is performing well. The unemployment rate does not decline sharply when the economy is hit by a positive disturbance because relationships take time to develop.

Conversely, consider what happens when a recession hits. Letting workers go takes only an instant. In a flexible labor market, firms are often quick to lay off workers to save costs, often letting go workers who have been with the company for years. So, when the economy is hit by a negative disturbance, the unemployment rate tends to spike as firms lay off large numbers of workers.

Cyclical asymmetry also occurs in population dynamics in the form of the “heat wave effect.” Often, mortality rates rise and the population suddenly declines when bad weather hits. Yet, when a streak of good weather hits, we don’t see a corresponding boost in the population, as it takes time to repopulate after a tragedy strikes. In the context of the labor market, a recession is a “heat wave” that leads to sudden job losses and an expansion is a spell of good weather that, over time, creates jobs more steadily.

How this graph was created: Search for “civilian unemployment rate” and pick the seasonally adjusted series from the first result.

Suggested by David Andolfatto and Andrew Spewak.

View on FRED, series used in this post: UNRATE

How’s manufacturing?

Depends on the sector

The industrial production (IP) index is a popular metric of economic activity because it’s available relatively quickly. This monthly data series covers only a part of economic activity, however. In particular, it misses the service sector and the government sector. The graph above shows its evolution since 1972 along with a subcomponent that covers only manufacturing. Note that the index is set at 100 in 2012, meaning that all the indexes will always cross in 2012. A particularly healthy sector will start lower before 2012 and then rise higher after 2012. The graph shows that manufacturing has done well compared with overall industrial production before 2012 and a little less well afterward. This hides considerable sectoral differences, though.

In this second graph, we highlight some sectors within manufacturing. The sector that appears to have suffered massive losses is apparel and leather goods. Indeed, clothes manufacturing largely migrated abroad during this time span, with a decrease in production of about 80% since the mid 1990s. On the other extreme is computer manufacturing; It was insignificant in the first years but has increased by 1200% since the mid 1990s. All other sectors lie somewhere in between, and they average out to the manufacturing index shown in the first graph, which does not look as dramatic as the second graph. Some other interesting observations in this second graph: The primary metal industry has remained essentially unchanged over the past 45 years, with its index hovering around 100 throughout the sample period. The furniture industry incurred great losses from the Great Recession that it has not yet recovered from. And the car industry is doing pretty well.

How these graphs were created: For the first, search for industrial production, select the two series (likely the top choices), click on “Add to Graph,” and adjust the time period to start on 1972-01-01. For the second, go to the industrial production release, and select the monthly and seasonally adjusted tags. In the list, choose the series according to industry, and click on “Add to Graph.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: INDPRO, IPG315A6S, IPG331S, IPG334S, IPG3361T3S, IPG337S, IPMAN

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