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The More Things Change

Yes, the recession devastated the labor market. But employment will eventually return to pre-2008 levels.


A job seeker looks at a bulletin at the Texas Workforce Commission's Workforce Solutions of Greater Dallas job resource center in Richardson, Texas Tuesday, July 5, 2011. The number of people applying for unemployment benefits fell last week to the lowest level in seven weeks, although applications remain elevated.  (AP Photo/LM Otero)(AP Photo/LM Otero)

Economists have spent recent years thinking about all the changes that the Great Recession may bring about in the United States: new consumer-spending habits, a sinking birth rate, and, especially, record levels of long-term unemployment. Nobel laureate Joseph Stiglitz, for instance, postulated in his 2010 book Freefall that the new normal jobless rate might be 7 percent to 8 percent.

But even though the recession was cataclysmic and unprecedented in many ways, most economists now think that the country’s so-called natural rate of unemployment won’t actually change much. We may take a while to return to prerecession levels, but the new normal will, it turns out, look a lot like the old normal.


Economists are particularly focused on signs that the U.S. economy has hit its natural rate of unemployment, which is distinct from the headline-grabbing monthly percentage of people out of work. It approximates something called the Non-Accelerating Inflation Rate of Unemployment, or NAIRU—the unemployment rate at which inflation is stable. The concept relies on the idea that too much slack in the labor market will exert downward pressure on prices and that a labor market reaching capacity will drive up wages and inflation.


You can also think of NAIRU as full employment. Whatever unemployment exists under these conditions is due to structural factors (such as a skills mismatch between employers and job seekers) rather than cyclical ones caused by lack of demand. Many economists think that it will take about a decade for structural full employment in the U.S. to return to the level it was leading up to the financial crisis. “I don’t anticipate that we would have a different NAIRU 10 years from now than what it was prior to the recession,” said David Altig, executive vice president and research director at the Federal Reserve Bank of Atlanta.


Structural unemployment has grown in the past 20 years, thanks to aging baby boomers, technological changes, the decline of manufacturing, and globalization. And Federal Reserve Board Chairman Ben Bernanke warned in a speech last week that jobless workers’ atrophying skills could convert the current high cyclical unemployment into structural unemployment. But most economists don’t see recession-era changes permanently pushing up the NAIRU.

Instead, the unemployment rate will fall slowly. Before the recession, the country’s natural unemployment was about 5 percent. In January, the nonpartisan Congressional Budget Office calculated the rate as roughly 6 percent at the end of 2011. Half of the extra percentage point is due to geographic and skills mismatches between workers and employers, one-quarter to extended unemployment insurance, and one-quarter to the effects of the long-term unemployed who have trouble landing a new job and remain vulnerable to unemployment once they do.

The United States probably won’t follow the European path of widening the safety net or enhancing job-protection measures. Those policies corresponded with permanently higher levels of unemployment.

Still, the effects of these structural factors should largely dissipate by 2022, according to CBO. Economists at IHS Global Insight think that the unemployment rate may fall below 6 percent in the second half of the decade without causing inflation to soar. Patience will be necessary, says Nigel Gault, IHS’s chief U.S. economist. “I think if we tried to get down to 6 percent very quickly, we could run into inflation problems.”


Returning to the old NAIRU doesn’t mean a return to the labor market of the 1990s. Ten years from now, the same natural level of unemployment will be associated with lower job growth, because of long-term changes in labor-force participation rates and the employment-population ratio, Altig says. And Gary Burtless, a Brookings Institution economist, says that workers may have less bargaining power, continuing the “progressive deterioration” of that force in the economy. But these changes will be mostly associated with long-term demographic and labor-market trends—not the recessionary blow dealt to the economy.

Washington’s response to the recession, too, is unlikely to have lingering effects on NAIRU, according to Burtless. The United States probably won’t follow the European path of widening the social-safety net and enhancing job-protection measures: Those European policies corresponded with permanently higher levels of unemployment. Congress did extend unemployment insurance during the Great Recession, but it is expected to cut back as the economy returns to normal. “Even in the worst of the recession, I thought it was very unlikely that [the U.S.] would have a new normal that is like Europe’s new normal in the late 1980s, where many, many countries just got adjusted to ... the reality that their unemployment rates would only get below 9 percent way off in the distant future,” Burtless says. “I don’t think the United States is going to behave like that.”

America’s natural rate of unemployment may stall at 6 percent for another decade or so, and the Fed may have to ease off its accommodative policy to avoid pushing up inflation. But, Burtless says, “I don’t think Americans will rest on their laurels when the unemployment rate hits 6.5 percent.” Economists seem to agree. We may have to be patient, but the Great Recession probably won’t permanently raise unemployment in the United States. 

This article appears in the April 7, 2012 edition of National Journal Magazine.

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