The Lean Years

Tuesday, September 21, 2010 at 10:38 am

Yesterday, the National Bureau of Economic Research’s Business Cycle Dating Committee — the team of economists that determines whether the economy is contracting (in a recession) or expanding — announced that the recession officially ended in June 2009.

That means little to the 14.9 million Americans out of work, of course. Unemployment tends to lag recessions, meaning that it takes some time for businesses to rehire workers after an economic shock, and in 28 percent of U.S. households, one member is still seeking a full-time job.

But how long until businesses start hiring again? Yesterday, the Center on Budget and Policy Priorities put out this ominous chart:

As the chart shows, it might take months and months for the economy to return to full employment. In reality, the chart is not quite ominous enough: Most economic evidence implies that the United States won’t return to an unemployment rate in the five percent range for years and years. Economists at the Kansas Fed examined the phenomenon in a paper called “How Will Unemployment Fare Following the Recession,” released at the end of last year.

First, they note that after deep recessions, the U.S. economy tends to rebound quickly. Why? Businesses initially react strongly to the bad recession, laying off workers, producing fewer goods, and selling off their inventories. When demand returns, those businesses need to hire workers and produce a lot of goods again, and fast, to keep up.

But, unfortunately, that dynamic has not been true for the recent recessions. Businesses lay off workers and stop producing goods as the recession hits. But when the recovery happens, businesses just make do with less — adding hours to existing workers, and rebuilding inventory slowly. This produces the “jobless recoveries” you hear about.

Moreover, recoveries tend to take longer after recessions paired with banking crises, like the Great Depression. And, yes, this recession kicked off with a massive meltdown on Wall Street, followed by woes in the commercial banking sector and the collapse of hundreds of small banks.

What does that mean? Years until employment recovers. By the Fed economists’ projections, the U.S. unemployment rate should hit 6.5 percent — a still-elevated rate — in 2018.

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Frank E. Vincent
Comment posted September 21, 2010 @ 3:33 pm

Reading this paper is just a waste of time. It serves no useful purpose.

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