Labor Hoarding...

From Stumbling and Mumbling:

The OBR reckons (pdf) that private sector employment will grow by a net 1.95 million between 2010-11 and 2015-16, more than enough to offset public sector job cuts. I agree with Anthony and Sunny that this is unlikely, for three reasons.

1. It’s a lot by historic standards. The OBR’s forecast is for an 8.3% increase. Although this is less than the 9.7% rise we had in 1993-98 - after the last recession - it is above the 5.6% rise we saw in the five years to the peak in 2008Q1.

2. And there’s a big difference between those five years and the next. Companies could borrow freely then. But unless things change a lot, they’ll not be able to in the next five years.

3. This recession has differed in one respect (at least!) from the early 90s’ one. Back then, firms were quick to shed staff, and so had to re-hire quickly as the economy picked up. This time, though, employment has held up well relative to output: since Q1 2008, private sector GDP has fallen by around 6.6%, whilst employment has dropped just 4.1%.

This suggests many firms have been hoarding labour and under-employing people. Perhaps they’ve been loath to sack skilled workers for fear of not being able to re-hire in the upturn. But this in turn suggests that if the economy recovers, firms will react by using existing labour more intensively, rather than by hiring new staff.

Of course, it could be instead that employment has held up not because of labour hoarding, but because of an adverse productivity shock. But if this is the case, how can employment rise quickly without generating inflation?

These suspicions make me wonder about the OBR. Their forecasts look very much like they are heeding Montagu Norman's advice to a Bank of England economist: “Your job is not to tell us what we should do, but to explain to us why we’ve done what we have.”