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22 Nov 2009 03:28 pm

For How Long Will Unemployment Keep Rising?

A reader said the current counter-recession policies felt like "Mission Accomplished" all over again. Mark Thoma explains why:

The most recent employment report shows the unemployment rate rising past 10 percent even though it appears output may have already turned the corner, while new claims for unemployment insurance are still over 500,000, a number that indicates the economy is still losing jobs overall. In fact, I am worried that the peak in unemployment could lag even further behind the recovery than it did in the last two recessions.

It’s not just the lag between the turning points in output and employment that leads to a pessimistic outlook for labor numbers. Once unemployment does peak, output still needs to return to its normal growth level before we see a return to full employment. The San Francisco Fed doesn’t expect a return to normal growth until the middle of 2012, and this means that unemployment likely won’t fully recover until somewhere in 2013.

The reason for the slow recovery is partly due to the depth of the recession — the deeper the hole, the longer it takes to crawl out of it — but it’s also because of the large amount of structural change that the economy must go through before it can recover. Prior to the recession we had too many resources in the housing, finance, and auto industries, and it will take time to move the people and resources who used to work in these industries into areas of the economy where they can be employed productively. And as new productive activities outside these areas arise, firms will install the best technology available. This technology will, in general, be more capital-intensive than before, and so we will need to surpass the pre-recession level of output before the demand for labor will return to its previous level. In addition, firms typically reorganize their job assignments after layoffs and discover that the same work can be performed with fewer workers and this, too, can slow the recovery period for employment relative to output.

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