Hours and Labor Market Slack
Payroll employment has declined substantially over the course of past two years. Since December 2007, when the most recent recession began, payrolls declined by more than 8.4 million, about 6.1 percent. At the same time, we experienced one of the sharpest increases in the unemployment rate in U.S. history, from 5 percent to 10.1 percent this past October, before coming down to 9.7 percent. Even though it is widely thought that the aggregate economy came out of the recession in the second quarter of 2009, we have not yet seen a major improvement in the labor market. As a result, many are concerned about the potentially “jobless” nature of the recovery (see our Commentary on the topic). Measures of the demand for labor are still weak, and firms could get away without hiring because there is a significant pool of workers who could, in principle, supply more hours.
One way employers can increase production before hiring new workers is to increase the average hours of their workforces. If the demand for their products is uncertain as the recovery is taking hold, firms have the option of adjusting hours per worker and avoiding a costly recruitment. It turns out that during the recent downturn, average hours declined substantially, so employers have a significant margin to work with before they have to start adding to payrolls.
The average weekly hours of production and nonsupervisory workers was at 33.9 hours at its peak, right before the beginning of the recession. It declined to 33.1 in the second quarter of 2009, which was a record low. It is currently at 33.1. This measure has shown a significant trend decline over time, but it still reveals a lot of high-frequency movements around the business cycle turning points. Namely, when the economy enters a recession, job cuts and reductions in hours translate into a decline in average hours. The decline during the most recent recession was one of the largest. We are still somewhat below the implied trend level, so there is still some room for employers to adjust hours per worker. However, if the more general trend decline continues, we may never see a significant uptick back to prerecession levels.
The average weekly hours in manufacturing has always been a more volatile series relative to that of the total private sector. The decline in the average workweek in manufacturing during the most recent recession was also quite striking by historical standards. The good news is that, since the sharp drop to 39.5 hours, the average workweek in this sector has started to improve. It is around 40.8, which is quite close to the average of the past 30 years. Indeed, once manufacturing hours started to improve, job losses in manufacturing declined and, finally, after two years of decline, manufacturing employment gained modestly in the first quarter of 2010.
The average hours of weekly overtime is another potential labor buffer in which we can see the effects of business cycle fluctuations. Throughout the most recent recession we have seen one of the largest drops in this measure, but it started to rise during the past two quarters. Adjusting overtime hours can be only a temporary solution for firms, but it might give many of them just a little more flexibility before they must start to hire again.
Measures of the average hours in a workweek, either for manufacturing or the total private sector, are aggregate measures. They do not distinguish between part-time or full-time workers. One troubling trend we saw in the most recent recession was the increase in the number of workers who work part-time for economic reasons. The figure climbed to 6.7 percent of total employment, the highest it has been since the 1981-82 recession. Workers are classified in this group in the BLS’s Current Population Survey for two possible reasons: They work part-time because business is slack, or they could not find a full-time job even though they wanted to.
It turns out that the rise in this group’s share of total employment was due to the growing number of those in the former group. The number of workers who worked part-time due to economic reasons was around 4.5 million at the onset of the recession (around 3 percent of total employment), which increased to more than 9.2 million (6.7 percent) by last November. More than 80 percent of those additional 4.5 million workers are working part-time not because they could find only part-time jobs but because their employers could afford only part-time workers, given the demand for their business.
As we have argued above, these workers constitute a large enough pool that firms could ramp up production and still avoid costly hiring and recruitment by just moving these part-time workers to full-time. Currently, the fraction of these workers is still far from its long-term average, which is more consistent with prerecession levels. Fortunately though, this measure has started to decline in the past four months. The sooner firms use up these underutilized resources, the sooner they will start hiring new workers.