The economy: Recovery and employment
It may come as quite a surprise that the U.S. economy is now in its fifth year of recovery from the Great Recession of December 2007 to June 2009, the most severe downturn since the Great Depression of the 1930s.
The recovery of the financial markets has been impressive, with the asset values more than doubling from the low point in March 2009 while recently reaching new highs. The near-panic turbulence in the financial markets is a thing of the past. Economic output (gross domestic product) adjusted for inflation is also above its pre-recession high, but the recovery in GDP has been much slower compared to past recessions.
Unfortunately the recovery in the labor markets has lagged, with the national unemployment rate still at 7.6 percent. This is well below the recession peak of 10 percent in October 2009, but is still very high by historical standards. For example, the current rate (four years after the recession ended) is higher than the peak rate during the previous recession and almost as high as the peak of the 1990-1991 recession. This situation in Illinois is even worse, with the unemployment rate 1.5 percentage points above the national average.
The current high unemployment rate would be much worse had not a large number of potential workers stopped seeking employment. Many people who lost their jobs in the recession have withdrawn from the job market through early retirement or apparent disability. There has been a sharp increase in those applying and receiving disability benefits.
The slow recovery in the employment sector raises the issue of whether a new normal is emerging. The Federal Reserve is now considering winding down its stimulus policies once the unemployment rate falls to 6.5 percent, which is higher than the maximum unemployment rate after the 2001 recession. Can we expect to return to the below 5 percent or lower unemployment rates of previous expansions? The short answer is no, at least for a considerable time.
There is some disagreement about the reasons for the sluggish employment picture. One suggestion is that the severity of the recession and the slow recovery is the cause. With productivity increasing at approximately the same rate as GDP growth, even profitable firms have little need to add workers. Productivity gains allow them to produce increased output with the existing workforce. Those with this view believe that accelerated growth is the key for improvement in the employment market.
A competing explanation is based on a structural problem in the employment market -- a mismatch of job openings and job skills. There are a number of reports about unfilled job openings because applicants lack the necessary skills required for the position. The slack employment market allows firms to demand more from new hires. There is also a geographic mismatch. Expanding job opportunities are often not in the same location where unemployment is greatest. People who have lost their jobs, especially older workers, who are still able to work may find it easier to retire or apply for disability rather than retrain or accept much-lower-paying jobs or move. The structural problem will not be resolved with an expanding economy.
There is one ray of hope in the construction area. Construction employment was severely impacted by the recession. Construction workers were often ill-equipped to move to other jobs. With the emerging recovery in construction, these workers may be reabsorbed into the workforce.
Even though there is cautious optimism about the near- and medium-term outlook for the economy, the long slow recovery of employment will continue to be a problem. Growth will help, but not solve the structural problem The new normal goal for unemployment may become 6 percent, compared to 4 or 5 percent in past decades.
J. Fred Giertz is director of the University of Illinois' Institute of Government and Public Affairs. He can be reached at 217-244-4822 or jgiertz@uillinois .edu.