The U.S. labor market has been steadily improving since turning around in March 2010. The economy is adding nearly 200,000 private-sector jobs each month. Initial claims for unemployment insurance recently fell to a five-year low, and the unemployment rate dropped from 10 percent in late 2009 to 7.4 percent today.
But job growth remains too slow. The unemployment rate has fallen for good reasons (more jobs) and bad (people leaving the labor force). Other measures indicate the job market is still in sad shape.
Unsurprisingly, real wage gains have been minimal in recent years. According to the Bureau of Labor Statistics, the real hourly wage has hardly moved since early 2007. Behind this flat trend are more troubling ones: Earnings at the lower end of the income distribution have fallen, while earnings at the upper end have risen. The median-income worker has fallen further behind.
In “This Time Is Different: Eight Centuries of Financial Folly,” authors Carmen M. Reinhart and Kenneth Rogoff showed that a recession caused by a systemic financial crisis takes much longer to recover from than one caused by other sources. They cautioned in 2009 that the latest downturn, like those of 1873, 1892, 1907 and 1929 that also originated in the financial sector, would be long and protracted. Unfortunately, their projections have so far been on the mark.
Short of inflating the economy, the Federal Reserve did about as much as could be expected to jump-start the economy. What about fiscal policies? Princeton economist Paul Krugman has been saying for years that, for the economy to get back on track, public spending must step in and fill the vacuum left by a lack of private demand. Equally prominent economists, such as Jeffrey Sachs of Columbia and N. Gregory Mankiw of Harvard, have warned that short-term stimulus packages are wasteful and lead to deeper debt.
What most economists would agree on is that de facto policies, which range from political gridlock and kicking the can down the road to the federal spending sequester, have slowed growth. According to our model of the U.S. economy, the sequester will cut GDP growth by half a percentage point in 2013.
The labor market is still in bad shape. However, it is improving, and we are more than halfway over the hump. Here is a sketch of how we expect the rest of the recovery to unfold. In the third quarter of this year, real per capita GDP will hit its previous peak last reached at the end of 2007. In the third quarter of 2014, payroll employment will reach its previous peak of January 2008. In late 2015, the unemployment rate will drop below 6.5 percent, and the Fed will start raising interest rates.
And in 2018, the jobless rate will drop below 5.5 percent — full employment, at last.
Patrick Newport is director of long-term forecasting at IHS Inc. in Lexington, Mass.
