Next week, President Obama will give a national address on job creation in the context of a sweeping jobs crisis. Without major initiatives by the federal government to put Americans back to work, we are looking at nearly a decade of persistent underemployment. The national unemployment rate has averaged 9.3% over the last year and has been stuck above 8% for the last two and a half years. (The broader underemployment rate, accounting for discouraged workers who have dropped out of the labor force and those working part time for economic reasons, has held over 15% for two and a half years.) Returning the unemployment rate to its pre-recession rate of 5.0% would require adding 11.1 million jobs, but monthly employment gains have averaged only 72,000 over the last three months (an annualized rate of 864,000 jobs). Meaningfully addressing the jobs crisis and lowering the unemployment rate requires significantly faster economic growth and employment gains than currently experienced or expected.
New projections from the Congressional Budget Office show that unemployment is projected to average 7.9% in 2014—seven years into this economic slump—and a return to full employment is not expected until 2017. Full employment is the level of employment consistent with stable price inflation and potential economic output (the economy is currently running $1 trillion (-6.3%) below potential economic output, largely because labor resources aren’t being employed), believed to be roughly 5.0% to 5.2% in the United States. Since the Great Depression, macroeconomic policy has generally targted full employment (the Federal Reserve's dual mandate is balancing maximum employment and price stability). A return to full employment in 2017 would come almost a decade after the recession began in December 2007 (as dated by the National Bureau of Economic Research). The recession is also dated as having ended in June 2009, although the past two years surely have not felt like a recovery for millions of households because of the ongoing jobs and foreclosure crises.
The expected return to full employment has been pushed back and CBO’s unemployment projections have been numerously revised upwards as the economic recovery has disappointed (see chart). In their January 2010 projections, CBO projected the unemployment rate would average 5.3% in 2014, meaning the economy would be approaching full employment. This forecast for 2014 was revised upwards to 6.8% in their January 2011 projections, more than a percentage point below their most recent August 2011 projections. With these revisions, the expected return to full employment has been pushed back roughly two years.
These longer-term CBO projections assume that the economy gradually reverts to potential economic output beyond two years of real economic forecasts. We have seen near-term forecasts revised downward, and the subsequent reversion to potential output delayed. (It is also possible for potential GDP to revert toward actual GDP, and CBO’s revised budget and economic outlook notes that potential output over 2017-2021 has already been revised downward 2% as a result of the recession). Unless Congress passes a large jobs package putting millions of Americans back to work, it is all too possible that unemployment projections will continue to be revised upwards and the return to full employment will prove elusive for years to come.
This trend of disappointing growth and unfavorable revisions to economic forecasts could be greatly exacerbated if federal budget cuts are added to the litany of economic headwinds blowing against recovery (the foreclosure crisis, overleveraged and underemployed consumers, state and local budget crises, a financial sector burdened by bad mortgage securities, and a spreading Eurozone financial crisis, to name just a few). Failure to renew emergency unemployment benefits and the payroll tax cut, coupled with the discretionary spending cuts imposed by the debt ceiling deal, risk 1.8 million job losses in 2012 alone. But just as budget policy has the ability to delay economic recovery, expansionary budget policy can bring about a more rapid decline in the unemployment rate.
In his recent address in Jackson Hole, Wyoming, Federal Reserve Chairman Ben Bernanke warned that fiscal policy must take into consideration the fragility of the economic recovery, and noted that “policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.”
The president should heed this advice and propose a jobs package that would noticeably turn the dial on the unemployment rate. Failure to meaningfully address the jobs crisis, on the other hand, risks a decade of economic hardship, unnecessarily high levels of underemployment, and forgone economic potential. Projections of 7.9% unemployment—above the peak unemployment rates of the previous two recessions—a staggering seven years into this economic slump is no cause for complacency. Alarm bells should be ringing in Washington.