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Not out of the Woods* Not Out of the Woods * A Report on the Jobless Recovery Underway In recent weeks, new signs of an economic recovery have emerged in the form of stock market rallies, surprisingly high bank profits, and better-than-feared official unemployment and economic growth reports. 1 But accompanying these so-called green shoots is worrying evidence of a recovery that could be compromised if not cut short altogether by high levels of unemployment and by a long period of unusually weak and uneven job creation. Not only is actual unemployment more severe than is reflected in official measures, it is also concentrated in those industries and sectors that must grow in order to replace debt-financed consumption as the United States’ primary economic engine. Indeed, what is emerging is what economists call a “jobless recovery,” but one in this case that could perpetuate the crises in the housing and banking sectors and prevent a sustainable and healthy economic recovery. The two most recent recessions of 1990-91 and 2001 were each followed by jobless recoveries: the labor market remained weak and relatively high unemployment persisted, well after the 18 months that it usually takes such indicators to rebalance themselves after downturns.2 Each of the last two jobless recoveries had progressively slower job growth than the one preceding it, 3 and recuperation from this current deep recession looks to have the slowest job growth yet. Projections suggest that employment levels will remain lower than they were during the previous business cycle for a long time; in fact, the Federal Reserve recently predicted that unemployment is unlikely to settle at the desired * Prepared by Niko Karvounis, Policy Analyst, Economic Growth Program, New America Foundation 1 See “Are We in an Economic Recovery Yet?: Analyzing the ‘Green Shoots’ Debate.” BNET, May 14, 2009. http://industry.bnet.com/financial-services/10001156/are-we-in-an-economic-recovery-yet- analyzing-the-green-shoots-debate/ ; “Green Shoots of Recovery or Hopeless Optimism?” CNN.com. May 19, 2009. http://edition.cnn.com/2009/BUSINESS/05/19/recession.green.shoots/index.html ; “Even Roubini Now Sees Green Shoots!,” Yahoo! Finance, May 27, 2009. http://finance.yahoo.com/techticker/article/254886/Even-Roubini-Now-Sees-Green-Shoots! 2 See for example Barry Bosworth, “A Jobless Recovery?: Offshoring of Jobs Versus Productivity Growth at Home,” Publications from the Forum for the Future of Higher Education, 2005, EDUCAUSE. http://net.educause.edu/ir/library/pdf/FFP0503S.pdf ; Jeffrey Frankel, “The Jobless Recovery,” The Forward, December 19, 2003. http://ksghome.harvard.edu/~jfrankel/The_jobless_recovery.pdf 3 Erica Groshen and Simon Potter, “Has Structural Change Contributed to a Jobless Recovery?,” Current Issues in Economics and Finance , Vol. 9, No. 8, August 2003, Federal Reserve Bank of New York. http://www.ny.frb.org/research/current_issues/ci9-8.pdf ; Robert Reich, “This Jobless Recovery is Worse Than the Last,” The American Prospect¸ January 16, 2003. http://www.prospect.org/cs/articles?article=this_jobless_recovery_is_worse_than_the_last ; Richard B. Freeman and William M. Rodgers III, “The Weak Jobs Recovery: Whatever Happened to ‘the Great American Jobs Machine’?” Federal Reserve Board of New York Economic Review¸ August 2005. pp. 3-18. http://www.newyorkfed.org/research/epr/05v11n1/0508free.pdf 1 “normal” level for another five to six years. 4 A protracted jobless recovery would have a particularly worrying effect on U.S. economic prospects because it would not only perpetuate the housing and banking crisis but complicate the painful deleveraging process that is just beginning in the household sector. In order to be able to both pay down debt and maintain consumption levels, households will need to enjoy a rise in incomes. But a protracted period of weak job growth and high levels of unemployment will put a damper on wages. Weak wage growth in turn will slow a recovery in private business investment, cutting off the traditional pathway to sustained economic recovery. This promises therefore to be no ordinary jobless recovery, just as this recession was no ordinary recession. In order to generate a real sustained economic recovery, the Obama Administration must do more to create jobs and close the huge job creation deficit. The True Scope of Unemployment According to the Bureau of Labor Statistics (BLS), the unemployment rate in the United States is currently at 9.4 percent, or 14.5 million Americans—a quarter-century high. 5 The total number of unemployed Americans has almost doubled since the recession began in December 2007, and 6 million jobs have been officially lost over that same period. Moreover, extended mass layoff events—in which a business has at least 50 initial claims for unemployment insurance filed against it during a consecutive 5-week period, and where at least 50 workers were separated from their jobs for more than 30 days and hourly pay—reached their highest first quarter level ever in 2009. 6 Projections for the future are similarly dismal. The Federal Reserve estimates that the unemployment rate for the fourth quarter of 2009 will fall somewhere between 9.2 and 9.6 percent, with only a modest decline in 2010 and a still-high unemployment rate of between 7.7 and 8.5 percent into late 2011. 7 The Congressional Budget Office projects that the unemployment rate will probably continue to rise into the second half of next year and peak above 10 percent, while the consensus of Blue Chips firms puts the average unemployment rate of 2010 at 9.7 percent. 8 These rates are far higher than the natural unemployment rate of 4 to 5 percent that economists account for in a healthy economy with “full” employment. Yet these estimates still understate the true scope of the problem because they conform to the official BLS definition of unemployment—which only addresses jobless people who 4 Federal Open Market Committee, Minutes for April 28-29, 2009. Federal Reserve, May 20, 2009. http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20090429.pdf 5 Bureau of Labor Statistics, “The Employment Situation: May 2009.” June 5, 2009. http://www.bls.gov/news.release/empsit.nr0.htm 6 Bureau of Labor Statistics, “Extended Mass Layoffs in the First Quarter of 2009.” May 12, 2009. http://www.bls.gov/news.release/pdf/mslo.pdf 7 Federal Open Market Committee, May 20, 2009. 8 Statement of CBO Director Douglas W. Elmendorf before the Committee on the Budget, U.S. House of Representatives, “The State of the Economy.” May 21, 2009.http://cbo.gov/ftpdocs/100xx/doc10086/05- 21-State_of_Economy_Testimony.pdf 2 have actively searched for work within the past four weeks. Official BLS measures do not consider other groups who currently make up the majority of underemployed Americans, such as workers who are forced to work part-time of necessity, people who want work but have not looked during the month before the unemployment survey, and people who have totally abandoned the job search. While the BLS does have an alternative, expanded measure of unemployment that accounts for the 2.2 million marginally attached workers (that is, jobless people who are available to work and have looked for worked over the past year) and the 9.1 million workers who are only employed part-time because they cannot find full-time work, this so-called “U6” measurement still leaves out the other 4.4 million Americans who report wanting to work but gave up the job search over a year ago. 9 Because of the incompleteness of official measures, Leo Hindery, Chairman of New America’s Smart Globalization Initiative, in cooperation with New America’s Economic Growth Program, has constructed a broader measurement of unemployment called effective unemployment. Effective unemployment incorporates the BLS’ more inclusive U6 measurement along with the 4.4 million-strong “labor force reserve” to give a more accurate accounting of the number of Americans lacking full-time, productive work. Currently, the effective unemployment total is 30.2 million people, more than twice the official BLS unemployment estimate. This number—when compared against a labor force measure that includes the 6.6 million Americans who report wanting work, who the BLS does not officially include in its calculations—represents an alarming 18.68 percent effective unemployment rate (Figure 1). Figure 1 Official vs. Effective Unemployment Rates 20% 17.39% 17.75% 18.68% 18% 16.70% Official 15.24% 15.87% 16% 14% Effective 12% 8.87% 9.36% 10% 7.19% 7.56% 8.08% 8.54% 8% 6% 4% 2% 0% Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Source: Bureau of Labor Statistics 9 See Bureau of Labor Statistics, Economic News Release, Table A-12: Alternative measures of labor underutilization. http://www.bls.gov/news.release/empsit.t12.htm and Economic News Release, Table A- 13: People not in the labor force and multiple job holders by sex, not seasonally adjusted. http://www.bls.gov/news.release/empsit.t13.htm 3 In sum, the reality is far worse than even the grimmest of reports from government and industry experts suggest: today there are more than 30 million people, and almost one- fifth of the labor force, out of work. The Threat of a Jobless Recovery Given the current seriousness of unemployment, a sustained economic recovery is likely to be more difficult than many expect. Recent historical precedent and economic analysis suggest that recovery from this recession will not only be a jobless recovery—in which high unemployment persists for many months after GDP growth improves—but may be so weak as to barely seem like any recovery at all. The most straightforward reason why recovery will be so painful is that jobs have been lost at an alarmingly rapid rate during this recession.
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