May 01, 2014

Does a Downward Trending Rate of Unemployment Signal a Healthy Recovery?

David P. Frenzia

The national unemployment rate in the United States has generally been trending downward from a peak of 10 percent in October 2009 following the collapse of the financial sector in September 2008. Specifically, before the recession, which officially started in December 2007, the national unemployment rate in the United States had been at or below 5 percent for the previous 30 months. In September 2012, the national unemployment rate was 7.8 percent. According to the latest available data, the national unemployment rate is 7.2 percent, a decrease of 0.4 percent since June 2013. The question is whether this downward trend in unemployment is truly indicative that the economy is on the road to recovery.

Although at first blush, downward trending unemployment points to a positive outlook, there are a few considerations that question whether the national unemployment rate paints an accurate picture. First, unlike previous recessions, this time the unemployment rate rose higher and faster, and has remained higher longer following a modest pace of job growth. The non-partisan Congressional Budget Office estimates that unemployment will not fall below 6 percent until 2017.

Second, when it comes to the long-term unemployed, defined as individuals who have been unemployed for 27 weeks or more, there has been little improvement. Currently, 4.1 million workers have been unemployed for at least 27 weeks, representing 36.9 percent of the unemployed. Over the last six months, the long-term unemployment rate has averaged at or near 37 percent. Before the recession, this figure averaged 17.5 percent.

Finally, while the national unemployment rate has fallen, the underemployment rate, which includes individuals who have taken part-time work in lieu of full-time work as well as individuals who were not in the labor force, but wanted and were available for work and had looked for a job within the last 12 months, has remained high. The underemployment rate, which peaked at 17.1 percent in the fall of 2009, was 13.6 percent in September 2013, but this figure does not include those who have not searched for work in the last 12 months and have given up their search of finding work altogether. Economists estimate that the actual underemployment rate is near 15.8 percent—significantly higher than the slack in the labor market captured by the Bureau of Labor Statistics labor underutilization measure.

While falling unemployment is positive, the jobs gap—the number of jobs needed to restore the labor market to its pre-recession health—is still well over 8 million, consisting of roughly 1.8 million jobs lost and 6.4 million jobs not gained to keep up with growth in the potential labor force. The most recent report showed a gain of just 148,000 jobs in September, fewer than the average monthly gain of 185,000 jobs over the last year. But, at the current rate of job growth, return to a healthy and vibrant labor market is years away.

David P. Frenzia

David P. Frenzia is an attorney with The Lowenbaum Partnership, LLC in Clayton, Missouri.