Jobless Rate Unlikely to Drop Below 8% Before 2012: CBO

According to a newly released report from the Congressional budget office, the U.S. unemployment rate, which has risen almost continuously since December 2007 (from 12/07 to 12/09, the unemployment rate jumped from 4.9% to 10%, and payrolls fell by about 7.2 million jobs), is unlikely to drop below 8% before fiscal 2012.

The main reason for that forecast is the slow recovery of the U.S. economy. CBO said it envisions only a gradual recovery in employment and other measures of the labor market.

Several factors are important to this outlook.

CBO: “First, and most important, output is expected to grow fairly slowly. Following the two previous most severe recessions in the postwar period—1973–1975 and 1981–1982—employment recovered much more rapidly than CBO and others currently expect. But those recoveries featured much faster growth in output than is now anticipated, with real GDP growing by 6.2 percent in the four quarters following the 1973–1975 recession and by 7.8 percent in the same period following the 1981–1982 recession. In contrast, employment changed little during the four quarters following the 1990–1991 recession, when real GDP rose by 2.6 percent; and employment fell by more than one million in the six quarters following the 2001 recession, when real GDP grew at an average annual rate of 2.1 percent. In CBO’s August update, real GDP was projected to increase by an average annual rate of a little more than 3 percent from the fourth quarter of 2009 to the fourth quarter of 2011.

Second, average weekly hours worked in private industries fell sharply during the recession to a level well below their long-term downward trend… Restoring hours of existing employees is one way that employers can increase labor input without having to bear the fixed costs of hiring new workers. Although average weekly hours worked increased in late 2009, they remain below the long-term trend, suggesting that many firms will increase workers’ hours before doing new hiring on a large scale.

Third, the movement of unemployed workers into new jobs will probably be more difficult in this recovery than in past ones. Recessions often accelerate the demise or shrinkage of less efficient and less profitable firms, especially those in declining industries and sectors. Thus, the share of unemployed workers whose previous job is permanently lost tends to rise during recessions; the rise has been especially pronounced during the past two years….At the same time, workers on temporary layoff represent a smaller percentage of the unemployed than they did in past recessions.

As a result, gains in employment after this recession will probably rely more than usual on the creation of new jobs, possibly in new firms that are located in different places and require workers with different skills than those needed in the jobs that have disappeared. ”

[emphasis added]

Read the whole report here »

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