Not Out of the Woods

Recent historical precedent and economic analysis suggest that recovery from this recession will not only be a jobless recovery—in which high unemployment persists for many months after GDP growth improves—but may be so weak as to barely seem like any recovery at all.

Related Programs:
Economic Growth Program

In recent weeks, new signs of an economic recovery have emerged in the form of stock market rallies, surprisingly high bank profits, and better-than-feared official unemployment and economic growth reports. But accompanying these so-called green shoots is worrying evidence of a recovery that could be compromised if not cut short altogether by high levels of unemployment and by a long period of unusually weak and uneven job creation.   Not only is actual unemployment more severe than is reflected in official measures, it is also concentrated in those industries and sectors that must grow in order to replace debt-financed consumption as the United States' primary economic engine. Indeed, what is emerging is what economists call a "jobless recovery," but one in this case that could perpetuate the crises in the housing and banking sectors and prevent a sustainable and healthy economic recovery.

The two most recent recessions of 1990-91 and 2001 were each followed by jobless recoveries: the labor market remained weak and relatively high unemployment persisted, well after the 18 months that it usually takes such indicators to rebalance themselves after downturns.  Each of the last two jobless recoveries had progressively slower job growth than the one preceding it, and recuperation from this current deep recession looks to have the slowest job growth yet. Projections suggest that employment levels will remain lower than they were during the previous business cycle for a long time; in fact, the Federal Reserve recently predicted that unemployment is unlikely to settle at the desired "normal" level for another five to six years.

A protracted jobless recovery would have a particularly worrying effect on U.S. economic prospects because it would not only perpetuate the housing and banking crisis but complicate the painful deleveraging process that is just beginning in the household sector.  In order to be able to both pay down debt and maintain consumption levels, households will need to enjoy a rise in incomes.  But a protracted period of weak job growth and high levels of unemployment will put a damper on wages.  Weak wage growth in turn will slow a recovery in private business investment, cutting off the traditional pathway to sustained economic recovery.  This promises therefore to be no ordinary jobless recovery, just as this recession was no ordinary recession.  In order to generate a real sustained economic recovery, the Obama Administration must do more to create jobs and close the huge job creation deficit.

Read the full policy paper in PDF form below.