Last month, the national unemployment rate fell to 8.1 percent. Given that the unemployment rate peaked at 10 percent in October 2009, the economy must have improved significantly over the last three years, right?
Actually, no. In many ways, the economy has barely improved, if at all. Put simply, the economy sucks.
Looking at the unemployment rate in isolation can be misleading. Over the last four years, many unemployed workers have grown discouraged and simply stopped looking for work. These people are no longer counted as part of the labor force or as "unemployed." In January 2008, the Congressional Budget Office estimated that there would be 5 to 6 million more individuals in the labor force today than is actually the case. If we calculate a "true" unemployment rate that includes these discouraged job-seekers, the unemployment rate surpassed 11 percent in fall 2009 and has remained between 11 and 12 percent ever since. Thus, contrary to what the official unemployment rate seems to indicate, the job market has not substantially improved over the last three years.
Alternatively, consider the percentage of working-age Americans who are actually working. The employment-to-population ratio fell from 62.7 percent when the recession started in December 2007 to 59.4 percent when the recession ended in June 2009. It is now 58.3 percent. In other words, the economy hasn't even been creating enough jobs to keep up with population growth, let alone enough jobs to start reducing unemployment in any meaningful way.
But unemployment is not the only harm caused by the economic malaise the crisis has also reduced American's incomes. From 1965 to 2007, the United States' real gross domestic product grew at an average rate of 3 percent per year. After every recession since the end of World War II, GDP grew faster than the previous trend rates, as GDP converged to its previous trend. However, since the end of the most recent recession, GDP growth has averaged only 2.4 percent per year. Thus, the average Americans' income is now about 14.5 percent lower than it would be if GDP had converged with its previous trend over the last three years.
When confronted with these facts, many people will attempt to excuse this abysmal economic performance in one of two ways. First, the recession was deeper than was initially believed in early 2009; second, the recession was due to a financial crisis.
However, neither of these facts implies that we should expect such a disappointing recovery. Over the last two centuries, the American economic record has been quite consistent the deeper the recession, the faster the recovery. Since GDP dropped during the recession by more than was initially estimated, we should be seeing faster than expected economic growth now, not slower. Likewise, recent economic research seems to indicate that, while recessions after financial crises have usually been deeper than average, the recoveries have also usually been quicker than average. In other words, even though the most recent recession was preceded by a financial crisis, one could still have reasonably expected in early 2009 that a deeper-than-usual recession would then be followed by faster-than-usual economic growth during the recovery. In fact, the Great Depression and the current economic malaise are the two major exceptions to this "deeper recession, faster recovery" rule of thumb. As a result, some economists have hypothesized that sclerotic recoveries are not caused by financial crises per se, but rather by bad government policies that have been adopted in the wake of certain financial crises.
Regardless, the simple fact is that the economy sucks, and this is really bad news for students like you and me who will be looking for a job either this year or sometime over the next couple of years. If you, like me, do not wish to become a newly unemployed college graduate any time soon, then you will likely have to spend more time and effort looking for a job than would have been the case even five or six years ago.
So, don't let an OK-looking unemployment rate fool you. Unless something changes soon, the economy will still suck by the time I graduate.
