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)
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Catherine Hollander
April 5, 2012, 1 p.m.

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. 


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