How Long Until We Reach Full Employment?

This is very much a back of the envelope calculation. Here’s what I did. I took the month to month difference in the unemployment rate (from 1948:2 to 2011:2), then took two averages, one when the difference is positive (unemployment is increasing) and one when the difference in negative (unemployment is falling):

Average monthly increase in unemployment: 0.2143
Average monthly decrease in unemployment: -0.1143

Notice that, as is evident in the graph, increases in the unemployment rate are, on average, larger than decreases. Thus, unemployment generally rises faster than it falls.

Next, I used the second number, -0.1143, to forecast the monthly changes in the unemployment rate (the red line in the graph). Since the precise value of the natural rate of unemployment is unknown, here are a few benchmarks:

7% unemployment in July of 2012
6% unemployment in March of 2013
5% unemployment in December of 2013
4% unemployment in September of 2014

If anything, relative to the last two recoveries, this forecast is optimistic. Even so, it will still take two years to get to 6% unemployment (and if the natural rate is closer to 5.5% at that time, as I expect it will be, it will take another five months to fully close the gap). Things may be looking up, but we have a long way to go and it’s too soon to turn our backs on the unemployed.

About Mark Thoma 243 Articles

Affiliation: University of Oregon

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987 and served as head of the Economics Department for five years. His research examines the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables with a focus on asymmetries in the response of these variables to policy changes, and on changes in the relationship between policy and the economy over time. He has also conducted research in other areas such as the relationship between the political party in power, and macroeconomic outcomes and using macroeconomic tools to predict transportation flows. He received his doctorate from Washington State University.

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