The Economist vs. the New York Fed on jobs

The cover of the Economist this week is on the outsourcing issue. Here’s a link to their editorial. The key graf:

For the past 250 years, politicians and hard-headed men of business have diligently ignored what economics has to say about the gains from trade—much as they may pretend, or in some cases even believe, that they are paying close attention. Except for those on the hard left, politicians of every ideological stripe these days swear their allegiance to the basic principle of free trade. Businessmen say the same. So when either group issues its calls for barriers against foreign competition, it is never because free trade is wrong in principle, it is because foreigners are cheating somehow, rendering the principles void. Or else it is because something about the way the world works has changed, so that the basic principles, ever valid in themselves, need to be adjusted. And those adjustments, of course, then oblige these staunch defenders of free-trade-in-principle to call for all manner of restrictions on trade. In this way, protectionism is periodically refreshed and reinvented.

Here’s the cover story. It’s worth a read, but there is one off-kilter point. At one juncture, the story says:

Although America’s economy has, overall, lost jobs since the start of the decade, the vast majority of these job losses are cyclical in nature, not structural. Now that the economy is recovering after the recession of 2001, so will the job picture, perhaps dramatically, over the next year. (emphasis added)

What’s weird is that the story provides a link to an August 2003 Federal Reserve Bank of New York Paper on why this economic recovery is different from other economic recoveries. Their conclusion:

We explore why the recovery from the most recent recession has brought no growth in jobs. We advance the hypothesis that structural changes—permanent shifts in the distribution of workers throughout the economy—have contributed significantly to the sluggishness in the job market. We find evidence of structural change in two features of the 2001 recession: the predominance of permanent job losses over temporary layoffs and the relocation of jobs from one industry to another. The data suggest that most of the jobs added during the recovery have been new positions in different firms and industries, not rehires. In our view, this shift to new jobs largely explains why the payroll numbers have been so slow to rise: Creating jobs takes longer than recalling workers to their old positions and is riskier in the current uncertain environment.

How different is this recovery? Take a look at this chart:

Share of Total Employment in Industries Undergoing Cyclical Changes and in Industries Undergoing Structural Changes

As the NY Fed paper notes:

The parallels between the two most recent recoveries raise hopes that the current recovery will ultimately follow the same course as its predecessor. After about eighteen months, the 1991-92 recovery ushered in very strong employment growth and the longest economic expansion of the postwar period.