Oddsmakers give the recession a short duration. Even dour Fed chairman Alan Greenspan has detected a few signs of early recovery. But not everyone is yet convinced.
Clearly, stock and bond investors have hedged their bets: All the averages are way below their optimistic thresholds. The bankruptcies of Enron, Kmart, Global Crossing and others have cast serious doubt about the sustainablity of recovery. And lingering in the background is always the threat of another terrorist attack, Mideast war, or Third World currency collapse.
As Joseph Stiglitz, chairman of President Clinton's Council of Economic Advisors and later chief economist for the World Bank, warned way back in November, this recession might turn out to be the worst in 20 years. As Professor Stigilitz sees it, a deep recession like 1981-82 is the best we can hope for. In that 16-month recession, output fell by 12.3% and unemployment soared to a post-war high of 10.8%.
By contrast, in the 1990-91 recession, output fell only 2.3% and unemployment peaked at 6.5%. That is the kind of short, shallow recession the optimists are hoping for this time around.
Despite the spate of warning signs, the optimistic outlook still remains storng. The optimists' case rests not only on the usual array of indicators-rising consumer confidence, abnormally low inventories, cheap money, and fiscal stimulus-but also on a wild cared few observers have noticed.
* * *Structural changes in the labor market have given employers much more flexibitily in hiring and firing workers. This enhanced labor-market flexibility will induce employers to ramp up employment as fast as sales increase-incontrast to the delayed hiring that slowed the 1982 recovery and, to a lesser extent, the "jobless" 1991-92 recovery. Tather than relying on overtime workers to meet increasing demand for output, employers are more likely this time around to turn to new hires to ratchet up production. This will bring the unemployment rate down more quickly and accelerate the pace of recovery.
A significant difference between the labor market of 1981-82 and today's labor market is the greatly diminished power of labor unions. President Reagan's confrontations with the air-traffic controllers pushed unions into an irreversible tail-spin. Union membership has fallen from over 20% of the work force, in 1980 to less than 14% today. In the private sector, the unionization rate is less than 9%.
This decline in unionism has helped to keep a lid on wages. It has also reduced structural rigidities in the workplace that inhibit productivity advance. Not least of all, the decline of unions has reduced the potential "back-end" cost of new hires, particularly in areas of pensions, health care, and layoffs.
Corporations have exploited and accelerated the decline of unionism by outsourcing increasing volumes of production. In a recession, outsourcing facilitates faster retrenchment in response to declining sales. By the same token, outsourcing provides a mechanism for ramping up production across a broad swath of industries when sales pick up. Global outsourcing has also made it possible to transfer the pain of layoffs to foreign plants (especially in information technology industries).
These structural changes are not an unmixed blessing, but they do have a salutary effect in dampening recessions. As employment conditions become more flexible, employers view workers more as a variable cost than as a fixed cost. As such, they are less hesitant to (re)hire workers when sales pick up. When, by contrast, new hires are "locked in" by union rules, pension rules, or legal impediments, companies will rely on overtime work rather than on new hires to ramp up production.
With more flexibility (less fixed cost), employment recovers more quickly along with final sales. That may help explain why new unempoyment claims jumped so suddenly in this recession and then receded so fast as well.
Employment flexibility has also been enhanced by wage restraint. The U.S. Labor Department's employment cost index has risen less than 9% since January 2000. That's comparable to the pace of pay advance in 1990-92 and about half the pace of the 1980-82 wage escalation.
The federal minimum wage was raised in 1980 and 1981 and again in both 1990 and 1991. Thus far, efforts to raise the minimum wage again during a recession have been resisted. The Bush administration has also successfully resisted new workplace regulations (e.g. ergonomic engineering) that would increase payroll costs. The courts are also reducing the potential liability associated with workplace injuries.
* * *These changes are not all unmitigated blessings. Here again, though, the question is whether these workplace changes accelerate economic recovery. On that score, they clearly add to the probability of a speedier recovery in jobs as well as output.
No one can foretell the future with certainty. It's always a question of probabilities. Experience suggests, however, that the brief and shallow 1990-91 recession is a far more appropriate model for the economy than is the deeper and longer 1981-82 recession. If the current recovery in fact follows that path, enhanced flexibility in labor markets will deserve as much credit as Alan Greenspan for keeping the recession short and shallow.
Mr. Schiller is a professor of economics at American University's School of Public Affairs. The ninth edition of his text, "The Economy Today," will be published by McGraw Hill nest month.