Headwinds to Labor Market Recovery Part I: Slower Job Creation

A recovery like we saw following the 1981 recession is unlikely coming out of this recession. After the 1981 recession – the worst in recent memory – the economy rebounded to recover all jobs lost during the recession in the 12 months after the recession ended. 2.82 million jobs were lost in 16 months. In the 12 months after the recession, the economy rebounded robustly and created 3.08 million jobs. Despite the quick rebound, the economy still took 76 months to arrive at a 5% unemployment rate.

In the current recession, the economy has shed 8.3 million jobs. Even if our economy grew at its fastest pace in the last decade, when 2.5 million jobs were added in 2005, it would take over 3 years of job creation to recover all the lost jobs and this does not address new entrants to the labor force.

The administration is forecasting that only around 1.1 million jobs will be created in 2010, equating to about 104,000 jobs each month for the rest of the year. This pace is indicative of neither a steep reduction in unemployment nor a robust recovery. A March 16 Treasury press release stated, “It typically takes employment growth of somewhat over 100,000 per month to bring the unemployment rate down. Because we do not expect job growth substantially over 100,000 per month over the remainder of the year, we do not expect substantial further declines in unemployment this year.”

So when will unemployment decline? Job growth is expected to accelerate in 2011, which will reduce the unemployment rate gradually. The Administration projects unemployment of 8.9 percent in the fourth quarter of 2011 and 7.9 percent in the fourth quarter of 2012. A recovery of this pace would put unemployment on track for more normal levels in late 2016 to mid 2017.



Other posts in the series Headwinds to Labor Market Recovery
Part II: Excessive Slack in Work Week
Part III: Permanent Layoffs
Part IV: Housing Markets