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2011 Annual Report

Labor markets grew only fitfully


The unemployment rate remained high in 2011, and payrolls were still well below prerecession levels. See the chart. With unemployment persistently high, it was hard to argue that the country's economy performed well. Several dynamics appear to have shaped the labor market in 2011 and contributed to the slow progress in bringing down the rate of unemployment. But the dominant factor continued to be the relatively slow pace of the expansion of economic activity.

Sidebar: Region's labor market lagged the nation's

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Employment in the Southeast remained below prerecession levels. During 2011, the region's total nonfarm employment increased by 1.3 percent, compared to a national gain of 1.4 percent. At the end of the year, the Southeast's job count was just under 19 million, more than a million jobs below the level of December 2007. The region's unemployment rate was 9.3 percent. This rate was significantly less than the 10.5 percent the region experienced a year earlier but still considerably higher than the national jobless rate of 8.5 percent. See the chart.

For several years before the recession, the Southeast outpaced the nation in job growth, largely spurred by population gains. In-migration likewise boosted real estate development. In 2010 and 2011, however, the region's population growth slowed to match the pace of the rest of the country.

That slowdown helped explain why improvement in the Southeast's economy, and in turn its labor market, has lagged the nation's for the past couple of years.

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Financial crises usually result in slow economic recoveries
For the most part, the same fundamental force—weak expansion of economic activity—continued to restrain job growth nationally and regionally as in 2010. Real gross domestic product (GDP), the broadest measure of economic performance, increased in 2011, but not by much. GDP expanded at a modest 1.7 percent pace. This kind of subpar growth was consistent with the research by economists Carmen Reinhart and Kenneth Rogoff, who have documented that recessions associated with debt-related financial crises are typically followed by below-normal recoveries. These economists identified a pattern in which the process of deleveraging, or paying down debt, restrains the overall demand for goods and services. That deleveraging process can take several years to complete.

Sidebar: Fewer start-ups meant fewer new jobs

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Young businesses, particularly those that grow quickly, are among the nation�s most significant sources of jobs. About 40 percent of new jobs in any given year come from the fastest-growing 1 percent of businesses, according to a 2010 study by the Kauffman Foundation, which researches and promotes entrepreneurship. Three-quarters of those high-growth businesses are five years old or younger.

In the past, economic downturns had very little impact on the rate of business formation. Businesses started at a fairly steady rate in both good times and bad. However, the flow of new businesses slowed dramatically during the last recession. The pace picked up somewhat in 2011, but it remained relatively subdued. The reduction in the number of new businesses negatively affected overall job creation in the economy. See the chart.

The relatively weak economic expansion, elevated uncertainty, and depressed housing market greatly complicated both operating a small business and starting a business in 2011. For instance, before the recession, home equity loans were a major source of financing for start-up businesses. But the decline in house values over the last few years seriously diminished this pool of funding for new entrepreneurs.

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Skill shortages not a primary cause of high unemployment
Some analysts have argued that, in addition to the slow pace of growth in GDP, certain labor market impediments may also have contributed to the relatively slow employment recovery. Anecdotally, mismatches between the skills that job seekers possess and the skills that employers need were frequently cited as an example of such impediments.

The general consensus among Atlanta Fed economists was that skills mismatch accounted for some of the slowness but was not a primary cause of high unemployment. See the video. Shortages of workers with certain skills and in certain industries have always existed, and this problem did not appear to be more widespread in 2011 than it was before the recession. In 2011, 32 percent of businesses reporting in a National Federation of Independent Business survey indicated they had few or no qualified applicants for job openings. This figure is significantly lower than the 43 percent that responded this way in 2007.

Other longer-term factors may have played a role
A slow rebound in employment after a recession is not a new phenomenon. The recoveries from the past three recessions have all been described as jobless recoveries. This consistency suggests that there may be longer-term structural changes in the economy that influenced labor market performance after the end of the last recession.

Specifically, job destruction in all of the past three recessions were heavily concentrated in jobs that required completing fairly repetitive tasks following a defined set of procedures. These included certain assembly-line tasks in manufacturing, as well as many clerical and retail-sales-related jobs. Likewise, during the postrecession expansions of the 1990s and the early 2000s, employment growth in routine-type jobs lagged growth in nonroutine occupations that were less easily automated.

The last recession was by far the most severe, but this pattern seems to have played out again against this more troubled backdrop. In 2011, total employment in occupations involving routine tasks was essentially flat, while employment in nonroutine occupations increased by almost 2 percent. Reports from Atlanta Fed business contacts suggested that firms in 2011 continued to invest in technology that boosted efficiency, which in turn lessened demand for workers to do some routine tasks.

Combined forces constrained labor markets
To sum up, improvement in labor market conditions in 2011 was apparently constrained by a combination of forces. Of these, slow growth in GDP remained a primary constraint holding back improvement in the labor market. Skill shortages were a factor, but not a dominant one, while broad shifts in the demand for certain types of jobs and tasks may also have played a role.
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video
Atlanta Fed Vice President and Senior Economist John Robertson discusses the role of skills mismatches in slow employment growth and other issues in the labor market.




Job destruction in all of the past three recessions were heavily concentrated in jobs that required completing fairly repetitive tasks.