Despite the official end of the recession in June 2009, the labor market remains stagnant. Employment has fallen by nearly 7 million jobs since the recession began. Unemployment remains above 9 percent. This is the weakest recovery of the post–World War II era. Current policies have not stimulated business hiring. If job creation occurs at the same rate as in the 2003–2007 expansion, unemployment will not return to pre-recession levels until 2018. If job creation continues at the low rate of the past year, unemployment will remain permanently high. Congress needs to act to prevent this by removing federal barriers to business investment and success.
Deep Recession, Weak Recovery
The collapse of the housing bubble and the resulting financial crisis plunged the U.S. economy into a deep recession in 2008. Unemployment rose above 10 percent, and employers shed more than 8 million net jobs.
The recession officially ended in June 2009, but payroll employment remains 6.9 million jobs below its December 2007 peak. The average unemployed worker has been without work for 39.7 weeks (nine months)—the longest since the government began keeping track in 1948.
This is the weakest recovery of the post–World War II era. In past recessions, employment fully recovered within two to three years. As of May 2011—three and a half years after the recession’s onset—payroll employment remains 5 percent below pre-recession levels. Unemployment stands at 9.1 percent.
How Long Until Unemployment Falls?
Some unemployment will always exist in the economy. Even in good economic conditions it takes time for workers to move between expanding and contracting businesses. Economists estimate that the “natural rate of unemployment” in the U.S. economy is 5.2 percent.
The Heritage Foundation used data from the Bureau of Labor Statistics to calculate how long, given certain levels of job creation, it would take unemployment to return to its natural rate. These estimates are not a prediction of how quickly unemployment will fall; instead, they illustrate what different rates of monthly job creation imply about the speed of the labor market recovery.
Even with strong economic growth, it will take time for unemployment to return to normal levels. If employers add an average of 260,000 net jobs per month—the rate the payroll survey showed during the late 1990s tech bubble—then unemployment will not return to its natural rate until August 2014.
If employers add 216,000 net new jobs per month—the rate the household survey showed in 1997, the year of the greatest job growth in the tech bubble—unemployment will return to its natural rate in October 2015.
Slow Recovery Likely
These are optimistic assumptions. The late 1990s was a period of unusually strong economic growth. During the 2003–2007 expansion, employers added an average of 176,000 jobs per month. If the recovery takes that more recent pace, unemployment will not return to normal rates until January 2018. Matching the rate of job growth in the recovery from the last recession would mean Americans would wait seven years for unemployment to recover.
The Congressional Budget Office (CBO) expects that the recovery will occur at roughly the same pace as the 2003–2007 expansion. The CBO’s latest economic forecasts show the economy returning to full employment in 2017. In other words, the CBO expects employers to soon begin hiring at a slightly faster rate than during the best years of the last decade. Even at that pace, unemployment would not return to normal levels until after the 2016 presidential election.
Unfortunately, the recovery has not proceeded even at this pace thus far. Following anemic job growth in 2010, the first quarter of 2011 showed strong employment gains. This raised hopes that the economy had finally begun a strong recovery. The most recent data suggests these hopes were illusory—hiring stalled and unemployment rose in April and May. The labor market appears stuck in neutral.
If that is the case, Americans will wait a long time for unemployment to fall. Modest job growth does not necessarily mean lower unemployment. The economy needs to add between 100,000 and 125,000 jobs per month to keep pace with population growth. Unemployment will rise if employers consistently create fewer jobs than this.
Over the past year, employment has grown by an average of just 122,000 jobs per month. If job growth continues at this rate, then the unemployment rate in January 2021 would stand at 7.4 percent. At the current rate of recovery, high unemployment will become the new normal.
Improve the Business Climate
Congress and the Administration should take immediate action to encourage job creation. Successfully doing so requires understanding why employers create jobs. Businesses and entrepreneurs hire workers to take advantage of opportunities to create goods and services consumers value—at a profit. Many government interventions in the economy reduce those opportunities. Small businesses currently identify taxes and government regulations as their most important problems.
Congress and the Administration can encourage lasting job creation by creating a better business climate. Removing barriers to business success and reducing unnecessary costs encourages businesses to hire. Such measures include:
- Repealing Obamacare and its associated employer mandates and tax increases;
- Preventing the Environmental Protection Agency from regulating carbon dioxide;
- Passing tort reform to reduce the cost of meritless lawsuits;
- Expanding trade agreements;
- Permitting more domestic energy production; and
- Reducing spending to mitigate the specter of enormous tax increases.
Congress can significantly intervene in the economy and erect barriers to business success—or Congress can remove artificial barriers to entrepreneurship and encourage risk-taking and innovation. Americans do not have to settle for 9 percent unemployment. Lasting economic stagnation is a policy choice.
James Sherk is Senior Policy Analyst in Labor Economics in the Center for Data Analysis at The Heritage Foundation.