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Letters to the Editor: Will American Unemployment Ever Start Falling?

Finance & Development, December 2009, Volume 46, Number 4

TWO important questions concerning the U.S. economy are troubling economists right now: When will the unemployment rate start falling? Will this recovery be a jobless one, like the one that followed the 2001 recession? What worries economists is that the unemployment rate could not only take some time before beginning to drop but also decline very slowly when it does.

Surviving the Third Wave,” by Hyun-Sung Khang (F&D, December 2009), notes that the unemployment rate is a “lagging” indicator in the business cycle; it only starts falling after recovery in economic activity has begun. But it is less often noted that the lag has been getting longer from cycle to cycle. After the 1981–82 recession officially ended in November 1982, unemployment started falling 2 months later. When the 1990–91 recession ended in March 1991, the lag had increased, and unemployment started falling 16 months later. Things got even worse after the end of the 2001 recession in November 2001, when it took unemployment 20 months to start falling. If the current contraction ended somewhere around June 2009, as many believe, the unemployment rate could peak somewhere around February or April 2011—that is, if the lag has not gotten any longer.

It has also been observed that the expansion that began in December 2001 created very few jobs. But the business cycle’s expansion phases have become less and less job creating over time. From 1970 to 1980, jobs grew at a rate of 2.4 percent a year. From 1980 to 1990 the rate fell to 1.8 percent a year, then to 1.4 percent during the 1990s and 0.8 percent a year from 2000 to 2008. If jobs grow at the rate they did between 2000 and 2008, unemployment will not come down.

There are, of course, some favorable trends that make unemployment easier to absorb than in the past. The growth rate of the working-age population has been falling for more than 10 years and is now increasing at less than 1 percent a year, down from its previous peak rate of 1.5 percent in 1997. The labor force participation rate has also been falling, declining from 76.5 percent in 1990 to 74.8 percent in 2009. Together, these two trends mean that the U.S. unemployment rate could today be stabilized by creating around 105,000 jobs a month instead of 175,000.

Francisco Vergara
President, Association pour la diffusion de l’économie politique Paris, France

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