A top Federal Reserve official warned Monday that even as the economy starts to grow again, employers are likely to continue squeezing more productivity out of workers rather than start hiring new ones, thereby prolonging the economic crisis for the millions of unemployed.
In remarks at the University of San Diego, Federal Reserve Bank of San Francisco President Janet Yellen said that rather than experiencing a "V-shaped recovery," the economy will continue to be sluggish and won't be operating at its full potential until 2013.
As reasons, she cited consumer anxiety due to the high unemployment rate; a housing sector that "could weaken again"; "very nervous and exceedingly cost-conscious" businesses; and a commercial real estate market that won't contribute to growth "for some time."
For workers, though, her prognosis was particularly dire: the labor market will be slow to recover because businesses have learned that they can cut workers yet maintain output.
"There is an alternative explanation regarding the events of last year, though, that bodes poorly for rapid employment gains going forward," she said in her prepared remarks. "According to this view, last year's large increase in productivity is here to stay. In that case, we won't see a quick drop in unemployment and may be in for a jobless recovery akin to those in the early 1990s and early 2000s. This is closer to my view and broadly consistent with my forecast," she said. She continued:
According to this perspective, the recession has forced businesses to reexamine just about everything they do with an eye toward restraining costs and boosting efficiency. Strapped by tight credit and plummeting sales, businesses have overhauled the way they manage supply chains, inventory, production practices, and staffing. Stores don't order merchandise unless they think they can sell it right away. Manufacturers and builders don't produce unless they have buyers lined up.
My business contacts describe this as a paradigm shift and they believe it's permanent. This process of implementing new efficiency gains may have only begun and we may be in store for further efficiency improvements and high productivity growth for some time. If so, the rate of job creation will be frustratingly slow.
Over the last three quarters worker productivity jumped an average of 6.8 percent, the highest three-quarter average in more than 40 years. Meanwhile, the economy has shed 8.4 million jobs since December 2007. The six-percent drop in payrolls is the largest decline since the end of World War II, Yellen said.