Why the unemployment rate is suprisingly low


Looming Labor Shortage. Last week's figures confirm that unemployment remains a major economic problem in America. That's why many in Washington continue to press for an extension of jobless benefits. But, considering the depth of the recession, the reported numbers are surprisingly low -- well below the 7.4 percent average unemployment rate in 1984, when the economy was expanding at a healthy 6.8 percent a year. Why doesn't the unemployment rate look as bad as other economic statistics? Some analysts have speculated that there are more ''discouraged workers," people who have given up looking for jobs and are therefore not counted as unemployed, than in previous downturns. This diagnosis is way off the mark. The good news on unemployment implies bad news for the economy. The news, however, is not that the U.S. economy has lost its ability to provide jobs. The relatively mild unemployment numbers are instead an early warning sign of a looming labor shortage in this country, which will slow the economy's future growth.

Historically, there has been a close relationship between the rate of economic growth and the change in the unemployment rate. Real gross national product needs to rise at a 2.5 percent annual rate in order to absorb growth in the labor force and the rising productivity of those already employed. Every percentage-point shortfall in the growth rate below this level normally increases the unemployment rate by about 0.4 percentage points. Based on this traditional relationship, the slump in the United States since 1989 should have raised the unemployment rate by about half a percentage point more than it has.

Restoring Job Cuts. Some jobs eliminated during this recession will never be restored. This is the case during most downturns. Recession tends to accelerate the decline of economic sectors that are already in a long-term employment slump. Between 1979 and 1982, back-to-back recessions cut the number of manufacturing jobs in the United States by 2.6 million. By 1989, only 0.7 million of these jobs had returned. Yet the permanent elimination of almost 2 million manufacturing jobs did not prevent the U.S. economy from employing 18 million more people in 1990 than it did in 1982. The jobs lost in manufacturing were more than made up for by the growth in service employment. And despite some conspicuous plant closures, most of the job losses during the current downturn do not look irreversible. Service employment has fallen less than 0.3 percent, while 75 percent of the job losses have been in durable goods and construction, industries that normally spring back rapidly during recovery.

The smaller than expected rise in unemployment during the current downturn suggests that the economy's growth potential has slowed, perhaps to less than 2 percent per year. This diminished potential is the result of reduced growth in the U.S. labor force. For the past 20 years, the labor force has increased much more quickly than the population, allowing the economy to grow at a rapid clip, despite lagging productivity. Behind the growth in the labor force has been demographic and social change. During the 1970s and '80s, baby boomers reached working age. Since relatively few children were being born, the employable share of the population increased. Meanwhile, as women entered the labor force in large numbers, the share of the employable population that sought work outside the home also rose sharply. As a result, from 1970 to 1990 the labor force expanded at more than double the rate of population. This cannot continue. The baby boomers have now grown up, and most women now hold jobs. In 1979-80, the labor force grew by 1.9 percent; in 1989-90, it grew by only 0.7 percent.

Slow-Growth Future. This means that once the recession is over and the American economy has more or less returned to full employment, it will find itself on a new, lower-growth track because of labor shortages. This may be good news for some workers, especially the relatively young and unskilled. But it will be bad news for corporate profits and the competitive position of the U.S. economy in the world marketplace.

More jobs

Permanent job losses stemming from the recession of 1981-82 were offset by rapid employment growth later in the decade.

Civilian employment

1981 100.4 mil.

1982 99.5 mil.

1983 100.8 mil.

1984 105.0 mil.

1985 107.2 mil.

1986 109.6 mil.

1987 112.4 mil.

1988 115.0 mil.

1989 117.3 mil.

1990 117.9 mil.

Lower unemployment

Joblessness during the 1990-91 recession has not increased as much as in past downturns.

Percentage growth in real GNP, Unemployment rate change

GNP Unemployment

1974-75 -0.9 pct. 1.8 pct.

1980 -0.2 pct. 1.3 pct.

1982 -2.5 pct. 2.1 pct.

1990-91 -0.3 pct. 0.7 pct.

Sluggish growth

Slowing productivity and declining labor force participation will impede future economic growth.

Productivity and labor force, average annual growth rate

Productivity Labor force

1950-59 2.6 pct. 1.1 pct.

1960-69 2.5 pct. 1.7 pct.

1970-79 1.2 pct. 2.7 pct.

1980-89 1.1 pct. 1.7 pct.

1990-99 1.1 pct. 1.0 pct.

Originally published, 10.14.91