Mark
Thoma links to the Kansas City Fed's
Nominal Wage Rigidities and the Future Path of Wage Growth by José Mustre-del-Río and Emily Pollard. Here's the opening:
Although unemployment and other measures of labor underutilization have returned to their pre-crisis levels, wage growth has remained modest since the Great Recession. The modest pace of wage growth since the end of the Great Recession is at odds with its behavior during the previous recession, when wage growth rebounded more quickly and sharply. Chart 1 shows the year-over-year percentage change in average hourly earnings of production and nonsupervisory workers. By late 2005, roughly four years after the end of the 2001 recession, year-over-year wage growth had surpassed 3 percent, and it reached 4 percent shortly thereafter. In contrast, nearly nine years after the end of the Great Recession, year-over-year wage growth has still not reached 3 percent.
They identify their data and the units in which they display it, so the graph was easy to duplicate:
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| Graph #2: Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private |
The KC Fed article points out that after the 2001 recession, it took "roughly four years" for year-over-year wage growth to climb above 3 percent; but after the Great Recession, it has been nearly nine years now and "wage growth has still not reached 3 percent".
They assume, or maybe they want us to assume, that the time it takes to reach a 3% increase should be comparable for different recessions. Should be more comparable than nine years versus four. I don't think this time-comparability is a valid assumption. What about "long and variable lags" and all that?
Anyway, as I said
near three years ago, the after-effects of the Great Recession follow the same pattern as that of the 1990-91 recession (note, not the 2001 recession) magnified by a time factor of 2.5 or so.
I find or expect to find similarity between the 1990-91 recession and the Great Recession in the following areas:
- The decline of accumulated debt, the increase of circulating money, the debt-per-dollar ratio, and household debt service data. (August 7, 2016)
- Productivity growth (August 21, 2016) (November 17, 2016)
- The ratio of private debt to public debt (February 11, 2017)
- Adequate growth of credit, with no excessive accumulation of debt for some time (March 27, 2017)
- Inflation (September 8, 2017) (September 13, 2017)
- Capacity Utilization (September 11, 2017)
- The recessions' "prolonged nature and the weakness of the subsequent recovery" (September 16, 2017)
- and also, now, nominal wage growth.
But up to now I have not looked into the comparability of nominal wage growth. Shall we?
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| Graph #3: Comparison of the 1990-91 Recession and the Great Recession |
In red the graph shows the data from Graph #2, beginning in January 2006, a little before the start of the Great Recession. From January 2006, the line rises sharply to around 4.0%, then runs jiggy at the 4% level until some months after 2007-05 when it suddenly drops below the 4% level and runs jiggy at the lower level for a while. The small, sudden drop from the 4% level marks the start of the Great Recession.
Around 2008-09 (September) the red line appears to be climbing back toward 4.0%, but turns and makes a dramatic fall to near 2.5%. This sudden drop looks like it should mark the start of the recession; actually, the
end of the recession occurs late in that decline, as the line falls below the 3% level.
In gray the graph shows the data from Graph #2 beginning in January 1990. I have delayed the gray data by 16 years so that we see it concurrent with the red (which begins in January 2006).
The gray rises quickly to the peak that marks the July 1990 start of the 1990-91 recession. Falling rapidly then, the gray looks similar to the red line's fall from 4% to 2.5%.
The recession ends just as the gray falls below 3%. Just like the red line! Perhaps it is no coincidence that the Kansas City Fed article considers how long it takes for the data to climb back up
to the 3% level after a recession ends.
Both lines continue to fall after the recession ends, the red until 2012-10 and the gray until 2008-09 (September 1992).
The red line shows increase since the 2012-10 bottom. This improvement in average hourly earnings is concurrent with an increase in the gray line. But the gray increase is higher and runs for a longer time. The two increases peak together (around 2014-03), and neither line shows much increase thereafter. These observations seem to suggest the view that the recovery after the Great Recession was much weaker than the recovery after the 1990-91 recession. And they seem to suggest that growth is behind us and we now await the onset of the next recession.
Such views are widely held today, but I believe them to be incorrect. I think the after-effects of the Great Recession follow the same pattern as that of the 1990-91 recession, magnified by a factor of 2.5 or so. The magnification delays the timing of events. Everything is happening in slow motion this time around.
To get a feel for the slow-motion pace of events since around 2006, I took the gray line from Graph #3 and multiplied its time increment values by 2.5. Thus on Graph #3, the gray line shows a peak around 2014-03, but on Graph #4 that same peak is delayed until well after 2025:
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| Graph #4: Comparison of Recessions with the 1990-91 Recession in Slow Motion |
To my eye there is great similarity between red and gray on this graph, far more than on Graph #3. The red drops much lower than the gray by 2011 or 2012, indicating greater severity of recession. But there is a striking similarity of timing, from the 2006 peak to the 2012 trough, clearly visible on this graph.
One effect of the severity of the Great Recession was to slow things down more than a normal recession. With the gray data slowed by a factor of 2.5, the declines hit bottom concurrently and the slow-motion effect becomes evident to the naked eye. No comparable similarity is visible on Graph #3.
From its low point, the red data bounces up to the 2.5% level, where it meets the gray data. I don't see that as coincidence. I see it as part of the similarity of these two recessions.
The recession's severity gives the red line some waviness while the gray runs flat at the 2.5% level. But the red persistently returns to 2.5% and the waviness dissipates over time.
That brings us to the present moment and the end of the red line.
What does the future hold? If the similarity of red and gray persists, average hourly earnings growth will show increase from now to 2026. And wouldn't that be something.
In 2016,
John Taylor wrote:
Because the economy has grown from the start of this recovery at a pace no greater than the prerecession trend, it has left a vulnerable gap of unrealized potential that can and should be closed with faster economic growth. In several key ways the US economy resembles an economy at the bottom of a recession, ready for a restart, even though the unemployment rate has reached 5 percent.
In the last two years the unemployment rate has dropped even more, and there has been some talk of improved growth. Warnings of another recession continue to arise from those who are thinking in terms of Graph #3.
I agree with John Taylor that in 2016 our economy resembled "an economy at the bottom of a recession, ready for a restart". In the last two years, our economy has been preparing for that restart. As Graph #4 shows, it is now ready. Prepare to be astounded by the vigor.
// EDIT, 16 June 2018: See also my follow-up post:
Recessions happen when the economy slows down. Recoveries happen when the economy speeds up.
