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Monday, June 08, 2009

Fed Letter: "Jobless Recovery Redux?"

by Calculated Risk on 6/08/2009 02:42:00 PM

Economic letter from the San Francisco Fed: Jobless Recovery Redux?

Although the pace of layoffs appears to be subsiding and the overall economy is showing hints of stabilization, most forecasters expect unemployment to continue to increase in coming months and to recede only gradually as recovery takes hold. In this Economic Letter, we evaluate this projection using data on three labor market indicators: worker flows into and out of unemployment; involuntary part-time employment; and temporary layoffs. We pay particular attention to how these indicators compare with data from previous episodes of recession and recovery. Our analysis generally supports projections that labor market weakness will persist, but our findings offer a basis for even greater pessimism about the outlook for the labor market. Specifically, we suggest that the relatively low level of temporary layoffs and high level of involuntary part-time workers make a jobless recovery similar to the one experienced in 1992 a plausible scenario.
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Jobless Recovery Click on graph for larger image in new window.
What does all this mean for the course of the labor market? We combine data on involuntary part-time workers with the standard unemployment rate to arrive at an alternative measure of labor underutilization. We plot this measure in Figure 3, which shows that the labor market has considerably more slack than the official unemployment rate indicates. The figure extends this labor underutilization measure using the Blue Chip consensus forecast for the unemployment rate as a benchmark and then adding a share of involuntary part-time workers based on the proportion of workers in that category to the unemployed during the current recession. This projection indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate. This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing workforces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates.
This weekend I plotted some graphs of jobs and the unemployment rate for four recessions and recoveries (1981, 1990, 2001, and the current recession). See: Jobs and the Unemployment Rate. Here is the graph for the 1990 recession and the jobless recovery that followed:

1990 Recession Jobs and Unemployment Rate The unemployment rate continued to rise for 15 months after the recession ended.

The researchers argue that the labor recovery following the current recession may be similar or worse than the jobless recovery following the 1991 recession:
[S]hould labor market conditions ... proceed along the path taken in the 1992 recovery, the unemployment rate could peak close to 11% in mid-2010 and remain above 9% through the end of 2011.