Average Recovery

Current Recovery

-4

0

4

8

12

0 2 4 6 8 10 12 14 16 18

Percentage Difference From End of Recession

Quarters After End of Recession

Employment After Recessions

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

The Slow Recovery

of the

Labor Market

FEBRUARY 2014
CBO

Notes

Numbers in the text may not add up to totals because of rounding.

The figures show vertical bars to indicate the duration of recessions. (A recession extends from 

the peak of a business cycle to its trough.)

The chart on the cover shows postrecession employment of all workers on nonfarm payrolls; 

it does not include data revisions released by the Bureau of Labor Statistics in February 2014. 

The line showing the average recovery is derived from data for the periods after the recessions 

ending in March 1975, November 1982, March 1991, and November 2001.

Pub. No. 4837
Contents

CBO

Summary 1

Developments in the Labor Market Since the Recession 2

Unemployment Rates 2

Labor Force Participation 4

Employment 4

Other Indicators 5

Interpreting Developments in the Labor Market 6

Causes of High Unemployment 6

Causes of Low Labor Force Participation 10

CBO’s Labor Market Projections for the Next Decade 12

Unemployment Rates 12

Labor Force Participation 13

Employment 14

Uncertainty of Projections 15

About This Document 16

List of Figures

1. Unemployment Rate 2

2. Rate of Long-Term Unemployment 3

3. Underutilization of Labor 3

4. Share of Workers Who Are Employed Part Time 4

5. Rate of Participation in the Labor Force 4

6. Total Nonfarm Employment 5

7. Share of the Population That Is Employed 5

8. Hourly Labor Compensation 6

9. Beveridge Curve: Relationship Between Job Vacancies and Unemployment 8

10. Actual and Natural Rates of Unemployment 12

11. Historical and Projected Rate of Participation in the Labor Force 13

12. Historical and Projected Share of the Population That Is Employed 14

CBO

The Slow Recovery of the Labor Market

Summary

The deep recession that began in December 2007, when 

the economy began to contract, and ended in June 2009, 

when the economy began to expand again, has had a lasting effect on the labor market. More than four and a half 

years after the end of the recession, employment has risen 

sluggishly—much more slowly than it grew, on average, 

during the four previous recoveries that lasted more than 

one year. At the same time, the unemployment rate has 

fallen only partway back to its prerecession level, and a 

significant part of that improvement is attributable to 

a decline in labor force participation that has occurred as 

an unusually large number of people have stopped 

looking for work.

To a large degree, the slow recovery of the labor market 

reflects the slow growth in the demand for goods and services, and hence gross domestic product (GDP). The 

Congressional Budget Office (CBO) estimates that GDP 

was 71⁄2 percent smaller than potential (maximum sustainable) GDP at the end of the recession; by the end of 

2013, less than one-half of that gap had been closed. 

With output growing so slowly, payrolls have increased 

slowly as well—and the slack in the labor market that can 

be seen in the elevated unemployment rate and part of 

the reduction in the rate of labor force participation mirrors the gap between actual and potential GDP.

To a smaller degree, the slow recovery of the labor market 

is the result of structural factors that stem from the recession and the slow recovery of output but that are not 

directly related to the economy’s current cyclical weakness. For example, an exceptionally large number of people have been unemployed for long periods, and the 

stigma attached to their long-term unemployment, along 

with a possible erosion of their job skills, has made it difficult for them to find new work.

In assessing the slow recovery of the labor market, CBO 

estimates the following:

 Of the roughly 2 percentage-point net increase in the 

rate of unemployment between the end of 2007 and 

the end of 2013, about 1 percentage point was the 

result of cyclical weakness in the demand for goods 

and services, and about 1 percentage point arose from 

structural factors; those factors are chiefly the stigma 

workers face and the erosion of skills that can stem 

from long-term unemployment (together worth about 

one-half of a percentage point of increase in the 

unemployment rate) and a decrease in the efficiency 

with which employers are filling vacancies (probably at 

least in part as a result of mismatches in skills and 

locations, and also worth about one-half of a 

percentage point of the increase in the unemployment 

rate).

 Of the roughly 3 percentage-point net decline in the 

labor force participation rate between the end of 2007 

and the end of 2013, about 11⁄2 percentage points was 

the result of long-term trends (primarily the aging 

of the population), about 1 percentage point was 

the result of temporary weakness in employment 

prospects and wages, and about one-half of a 

percentage point was attributable to unusual aspects 

of the slow recovery that led workers to become 

discouraged and permanently drop out of the labor 

force.

 Employment at the end of 2013 was about 6 million 

jobs short of where it would be if the unemployment 

rate had returned to its prerecession level and if the 

participation rate had risen to the level it would have 

attained without the current cyclical weakness. Those 

factors account roughly equally for the shortfall. 
2 THE SLOW RECOVERY OF THE LABOR MARKET FEBRUARY 2014

CBO

Figure 1.

Unemployment Rate

(Percent)

Sources: Congressional Budget Office; Bureau of Labor Statistics.

Notes: The unemployment rate is a measure of the number of 

jobless people who are available for and actively seeking 

work, expressed as a percentage of the labor force. 

Data are quarterly and are plotted through 2013.

CBO expects that, under current laws governing federal 

taxes and spending, output will grow more rapidly in the 

next few years than it has in the recent past but recovery 

in the labor market will continue for some time.1

 The 

agency projects that by the second half of 2017, the 

gap between actual and potential GDP will return to its 

average historical relationship—bringing the effects of 

cyclical conditions on unemployment and labor force 

participation back to their average values in 2018. However, CBO projects, the aging of the population will 

further reduce labor force participation during the coming decade, and the longer-lasting effects of the recession 

and slow recovery on unemployment and the size of the 

labor force will continue, albeit with diminishing magnitude, throughout the decade. All told, CBO projects that 

the unemployment rate will fall to 5.8 percent by the end 

of 2017 and to 5.5 percent by 2024 (compared with 

4.8 percent at the end of 2007) and that the labor force 

participation rate will decline to 60.8 percent by 2024 

(compared with 66.0 percent at the end of 2007).

The pace and nature of the economic recovery have been 

difficult to predict, and the path of the economy and the 

labor market will no doubt hold surprises as well. CBO’s 

projections of the labor market are subject to several 

sources of uncertainty, and many developments could 

cause outcomes substantially different from those CBO 

has projected.

Developments in the Labor Market 

Since the Recession

The U.S. labor market has recovered slowly and only 

partially since June 2009, when the recession ended. 

Evidence of a weak recovery appears in the data on 

employment, unemployment, labor force participation, 

and other indicators of labor market activity. Although 

the recession ended more than four and a half years ago, 

the unemployment rate and, notably, the rate of longterm unemployment are still high; the labor force 

participation rate is well below its trend; and employment 

has not returned to its prerecession peak.

Unemployment Rates

The share of people in the labor force who are 

unemployed has fallen in recent years but remains 

high (see Figure 1).2

 It fell to 7.0 percent in the fourth 

quarter of 2013 (and 6.7 percent in December) after 

having reached a peak of almost 10 percent in the fourth 

quarter of 2009. Although the unemployment rate has 

reversed more than half its rise during the recession, it 

remains high by historical standards; its slow decline since 

the recent peak reflects in part the slowest recovery in 

employment following a recession since 1975 (except for 

the recession during 1980, which was followed by 

another recession only 12 months later).

Although the rate of long-term unemployment—the 

percentage of the labor force that has been out of work 

for more than 26 consecutive weeks—also has declined 

in the past few years, it remains extraordinarily high 

(see Figure 2). The long-term unemployment rate was 

0.8 percent in 2007; by the second quarter of 2010 it had 

surged to 4.3 percent. Although that rate has since 

declined to 2.6 percent, it is still higher than at any time 

between 1948 (when such data were first collected) and 

2008. The long-term unemployed currently number 

about 4 million, compared with 1.3 million before the 

recession. In contrast, the share of the labor force that

1. See Congressional Budget Office, The Budget and Economic 

Outlook: 2014 to 2024 (February 2014), Chapter 2, 

www.cbo.gov/publication/45010.

0

2

4

6

8

10

12

1950 1960 1970 1980 1990 2000 2010

2. The labor force consists of people age 16 or older in the civilian 

noninstitutionalized population who have jobs or who are 

available for and actively seeking work. People are considered 

unemployed if they have no work but are available for and actively 

seeking work.
FEBRUARY 2014 THE SLOW RECOVERY OF THE LABOR MARKET 3

CBO

Figure 2.

Rate of Long-Term Unemployment

(Percent)

Sources: Congressional Budget Office; Bureau of Labor Statistics.

Notes: The rate of long-term unemployment is the percentage of 

the labor force that has been out of work for more than 

26 consecutive weeks.

Data are quarterly and are plotted through 2013. The data 

before 1994 are not strictly comparable with the later data.

has been unemployed for less than five weeks rose from 

1.7 percent to 2.1 percent during the recession and by 

2011 had fallen back to close to its prerecession level; the 

share of the labor force that has been unemployed for 5 to 

26 weeks rose from 2.2 percent to 4.7 percent during the 

recession but fell to 2.8 percent at the end of 2013.

Broader indicators in the labor market also have 

improved only slowly. For example, the Bureau of Labor 

Statistics publishes a measure of underutilization in the 

labor market called U-6, which combines the number of 

unemployed people with numbers for two other groups 

of people: those who are “marginally attached” to the 

labor force (that is, who are not currently looking for 

work but are willing and able to work and who have 

looked for work in the past 12 months) and part-time 

employees who work less than 35 hours per week in all 

jobs for economic reasons (either because of slack work or 

business conditions or because they cannot find full-time 

employment). By the fourth quarter of 2013, declines in 

the number of people in each of those groups had 

reduced the U-6 measure to 13.3 percent, a notable 

improvement relative to the 17.1 percent mark in the 

fourth quarter of 2009 but still significantly above the 

8.5 percent reading in the fourth quarter of 2007 (see 

Figure 3).

The share of employees who usually work part time 

rose during the recession, reaching 20 percent in 2010, 

compared with 17 percent in 2007. Although most people who work part time do so for noneconomic reasons, 

those who worked part time for economic reasons 

accounted for more than the entire increase in the share 

of employees working part time. That share has declined 

slowly but steadily since the end of the recession 

(although it remains above prerecession levels), and 

people who work part time for economic reasons have 

accounted for more than the entire decline (see Figure 4).

Patterns of unemployment by age, sex, and educational 

attainment indicate that no group has been spared in the 

weak labor market. However, the increase in unemployment during the recession was most pronounced among 

men and among some categories of workers with higherthan-average unemployment rates before the recession 

(such as people under age 25 and those without a high 

school diploma). Unemployment rates for all major categories of workers have declined over the past several years, 

reversing between half and three-fourths of their earlier 

increases, but they are still high.

Figure 3.

Underutilization of Labor

(Percent)

Sources: Congressional Budget Office; Bureau of Labor Statistics.

Notes: This measure of the underutilization of labor, called U-6, 

combines the total number of people who are unemployed, 

those who are marginally attached to the labor force (who 

are not currently looking for work but are willing and able to 

work and have looked for work in the past 12 months), and 

those who work part time for economic reasons. It is 

expressed as a percentage of the labor force plus the 

number of marginally attached workers.

Data are quarterly and are plotted through 2013.

0

1

2

3

4

5

1950 1960 1970 1980 1990 2000 2010

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

4

0

8

12

16

20
4 THE SLOW RECOVERY OF THE LABOR MARKET FEBRUARY 2014

CBO

Figure 4.

Share of Workers Who Are Employed Part Time

(Percentage of total employment)

Sources: Congressional Budget Office; Bureau of Labor Statistics.

Notes: Part-time employees are people who usually work less than 

35 hours per week. The share of part-time employment for 

economic reasons is the percentage of workers who work 

part time because of slack work or business conditions or 

because they cannot find full-time employment. 

Data are quarterly and are plotted through 2013.

Labor Force Participation

Another striking consequence of the weak labor market 

has been the sharp decline in the labor force participation 

rate, the percentage of people in the civilian noninstitutionalized population who are age 16 or older and either 

working or actively seeking work (see Figure 5). That rate 

reflects people’s decisions about the attractiveness of 

working or searching for work compared with such alternatives as attending school, caring for family members, 

or retiring. Key determinants include the demographic 

characteristics of the population and the availability of 

opportunities for employment. Participation typically 

falls when labor demand is weak, but poor prospects in 

the labor market seem to have had an unusually large 

effect in recent years.

The labor force participation rate edged downward 

by about one-quarter of a percentage point during 

the 2007–2009 recession, and it has fallen by about 

23⁄4 percentage points since the end of the recession—to 

62.9 percent in the fourth quarter of 2013, the lowest 

rate since 1978. The postrecession decline partly reflects 

the aging of the baby-boom generation, whose members 

have been reaching typical retirement ages (the oldest 

of the group turned 65 in 2011). But it also reflects 

declining participation within some age groups. For men 

between the ages of 25 and 54, participation, which had 

been falling gradually over a period of four decades, fell 

by another 1.4 percentage points from 2009 to 2013. 

Participation among women in the same age group rose 

steadily between the 1950s and late 1990s, but then flattened for several years and fell by 1.8 percentage points 

from 2009 to 2013. Participation among men and 

women under age 25 fell by 1.8 percentage points 

between 2009 and 2013, a decline that was roughly in 

line with its trend over the previous decade. And participation among people between the ages of 55 and 64, 

which had been rising before the recession, has edged 

slightly lower since 2009. In contrast, the pronounced 

upward trend in the participation rate among people age 

65 or older since the mid-1990s has continued.

Employment

Employment has picked up since the recession, but it has 

grown slowly, and employers now report having about 

1 million fewer workers on their payrolls than they had 

in early 2008. The number of employees in nonfarm jobs 

peaked at 138 million in the first quarter of 2008 and 

fell to 129 million by the first quarter of 2010; since 

Figure 5.

Rate of Participation in the Labor Force 

(Percent)

Sources: Congressional Budget Office; Bureau of Labor Statistics.

Notes: The rate of participation in the labor force is the percentage 

of the civilian noninstitutionalized population age 16 or 

older that is either working or available for and actively 

seeking work. 

Data are quarterly and are plotted through 2013.

0

4

8

12

16

20

24

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Total

Working Part Time for Economic Reasons

0

58

60

62

64

66

68

1950 1960 1970 1980 1990 2000 2010
FEBRUARY 2014 THE SLOW RECOVERY OF THE LABOR MARKET 5

CBO

Figure 6.

Total Nonfarm Employment

(Millions of jobs)

Sources: Congressional Budget Office; Bureau of Labor Statistics.

Notes: Nonfarm employment consists of all employees on nonfarm 

payrolls. 

Data are quarterly and are plotted through 2013.

then, nonfarm employment has been on an upward 

trend, although it is still not quite 137 million—notwithstanding the growth in the U.S. population since 

2008 (see Figure 6).3

In fact, employment has recovered essentially none of 

its dramatic decline as a share of the population. The 

employment-to-population ratio fell sharply from its 

prerecession peak of 63.3 percent in the fourth quarter of 

2006 and now is barely above its postrecession low of 

58.3 percent (see Figure 7).4

 That change reflects both 

the decline in the rate of labor force participation and the 

increase in the rate of unemployment. If the unemployment rate had returned to its prerecession level and if the 

participation rate had risen to the level it would have 

attained without the current cyclical weakness, the 

employment-to-population ratio would be 60.8 percent, 

2.3 percentage points above the current 58.5 percent, 

translating roughly to 6 million jobs.

Other Indicators

Other indicators of conditions in the labor market 

suggest that although fewer people are becoming unemployed, finding work is still unusually difficult. After 

rising during the recession, layoffs and discharges from 

employment have fallen back below their prerecession 

rates. As a result, initial claims for unemployment insurance (UI) benefits, which more than doubled during 

the recession, also are close to prerecession rates (based 

on a four-week moving average, which reduces the weekto-week volatility in this measure). In addition, the 

incidence of people quitting their jobs has increased, 

perhaps reflecting workers’ improved perceptions about 

their ability to find new employment. Hiring, however, 

remains well below its prerecession rate, and, as a consequence, the probability that an unemployed person will 

find a job within a given period is significantly less than it 

Figure 7.

Share of the Population That Is Employed

(Percent)

Sources: Congressional Budget Office; Bureau of Labor Statistics.

Notes: Data show the number of employed workers (as measured 

by the Current Population Survey) as a percentage of the 

civilian noninstitutionalized population age 16 or older.

Data are quarterly and are plotted through 2013.

3. Those figures are based on data from the Bureau of Labor 

Statistics as of January 10, 2014; they do not account for 

benchmark revisions scheduled for February 7, 2014. In a 

preliminary announcement, the Bureau of Labor Statistics, 

which calculates payroll employment on the basis of a survey 

of nonfarm establishments, indicated that the March 2013 

employment figure would probably be revised upward by about 

350,000 and that the revision is more than fully accounted for by 

a change in the classification of some establishments providing 

nonmedical home-based services for the elderly and people with 

disabilities. With that change excluded, the growth of 

employment between March 2012 and March 2013 is expected to 

be revised downward by about 125,000. Estimates of employment 

growth since March 2013 also may be revised.

4. The employment-to-population ratio uses a measure of 

employment from the Bureau of Labor Statistics’ household 

survey of employment. Although the magnitudes of that measure 

and of payroll employment differ, their growth rates are generally 

similar.

110

0

120

130

140

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

0

54

56

58

60

62

64

66

1950 1960 1970 1980 1990 2000 2010
6 THE SLOW RECOVERY OF THE LABOR MARKET FEBRUARY 2014

CBO

Figure 8.

Hourly Labor Compensation

(Percentage change from the previous year)

Sources: Congressional Budget Office; Bureau of Labor Statistics.

Notes: The data are employment cost indexes for workers in private 

industry. Total compensation is wages and salaries plus 

benefits.

Data are quarterly and are plotted through the third quarter 

of 2013.

was before the recession. Indeed, the number of job seekers for each open job is still high: That ratio was 1.8 in 

December 2007, it reached a peak of 6.7 in July 2009, 

and then dropped to 2.7 by November 2013.

The slow recovery of the labor market has depressed 

growth in labor compensation (the combination of 

wages, salaries, and benefits that workers receive). Hourly 

wages and compensation for private industry workers 

grew at an annual rate of about 3 percent in the years just 

before the recession; but since then, they have grown at a 

rate of about 2 percent annually (see Figure 8).5

 In real 

(inflation-adjusted) terms, hourly compensation in the 

third quarter of 2013 was only 0.5 percent above its mark 

in the second quarter of 2009, at the end of the recession.

The slow growth of hourly compensation, combined 

with the slow growth of employment, has led to a decline 

in the labor share of total income. Labor income, which 

includes compensation and some proprietors’ income, 

has declined as a share of gross domestic income (GDI) 

since the end of the recession, falling more sharply than 

its previous downward trend.6

 CBO estimates that labor’s 

share averaged about 57 percent in 2013, down from 

more than 59 percent in 2008 (and an average of about 

591⁄2 percent since 1980). In contrast, domestic economic 

profits’ share of GDI rose over that period, reaching 

9.5 percent of GDI, CBO estimates, up from 6.8 percent 

in mid-2009.7

Interpreting Developments in the 

Labor Market

The improvement of the labor market during the past 

several years has been slow because of cyclical and structural factors. Cyclical weakness in the overall demand for 

goods and services, which has been the more important 

of the two, has hampered the growth of employment, 

impeded the reduction in the unemployment rate, and 

depressed the labor force participation rate. However, 

structural factors—noncyclical forces that alter the willingness and ability of unemployed workers to find jobs 

and of employers to find suitable workers—also have 

restrained the recovery in the labor market.

Causes of High Unemployment

The slow growth of the economy has been the most 

important determinant of the path of the unemployment 

rate in the years since the onset of the recession, but 

structural factors have played a notable role as well—

and one that has become relatively more significant as the 

5. One manifestation of the weakness in the growth of labor 

compensation is the unusually large number of workers who have 

received no wage increases since the end of the recession. Had it 

not been for employers’ reluctance to cut employees’ nominal 

wages, the growth of labor compensation probably would have 

slowed even more. For more information, see Mary C. Daly and 

Bart Hobijn, Downward Nominal Wage Rigidities Bend the Philips 

Curve, Working Paper 2013-08 (Federal Reserve Bank of San 

Francisco, June 2013), http://tinyurl.com/oomgxn7.

0

1

2

3

4

5

6

1990 1995 2000 2005 2010

Wages and Salaries

Total Compensation

6. In principle, GDI equals GDP in that each dollar of production 

produces a dollar of income; in practice, the two differ because 

of difficulties in measuring both quantities. CBO defines labor 

income as the sum of employees’ compensation and a percentage 

of proprietors’ income (that percentage being employees’ 

compensation as a share of the difference between GDI and 

proprietors’ income). For further discussion, see Congressional 

Budget Office, How CBO Projects Income (July 2013), 

www.cbo.gov/publication/44433; and Congressional Budget 

Office, The Budget and Economic Outlook: 2014 to 2024 

(February 2014), Chapter 2, www.cbo.gov/publication/40510.

7. Domestic economic profits are corporations’ U.S. profits adjusted 

to remove distortions in depreciation allowances that result from 

tax rules and to exclude the effects of inflation on the value of 

inventories. Domestic economic profits exclude certain types of 

income that U.S.-based multinational corporations derive from 

foreign sources, most of which does not generate corporate 

income tax receipts in the United States.
FEBRUARY 2014 THE SLOW RECOVERY OF THE LABOR MARKET 7

CBO

economy has improved. By the end of 2013, the causes of 

the roughly 2 percentage-point net increase in the rate 

of unemployment since the end of 2007 were identified 

as having been almost equally cyclical and structural, in 

CBO’s assessment.8

 (As discussed below, the current 

cyclical weakness of the economy would have a larger 

effect on the unemployment rate if it was not also holding down the participation rate.) If the unemployment 

rate was back down to its prerecession level of roughly 

5 percent—about 2 percentage points below the average 

unemployment rate in the fourth quarter of last year—

about 3 million people who are currently looking for 

work would be employed.

Cyclical Economic Weakness. According to CBO’s assessment, the slow recovery of the labor market primarily 

reflects the slow recovery in production, which in turn is 

a reflection of the slow recovery in the demand for goods 

and services. By the second quarter of 2009, CBO 

estimates, real GDP was about 71⁄2 percent below its 

potential level. From that point through the end of 2013, 

real output grew at an average annual rate of almost 

21⁄2 percent, leaving it roughly 4 percent below potential 

GDP by the end of last year.9

 The unemployment rate 

typically increases when actual economic output falls 

short of potential output, decreasing employers’ demand 

for workers. On average, and all else being equal, an 

output gap of -2 percent (when output is 2 percent below 

its estimated potential) has been associated with an 

unemployment rate that is 1 percentage point above the 

natural rate (the rate arising from all sources other than 

fluctuations in the overall demand for goods and services). In the absence of the unusual factors affecting the 

labor market, the application of that historical relationship to the gap between actual and estimated potential 

GDP at the end of 2013 suggests that the cyclical weakness of the economy was responsible for elevating the 

unemployment rate by about 2 percentage points.

However, the historical relationship between the output 

gap and the unemployment rate does not account 

adequately for some of the structural factors that are 

currently pushing up unemployment or for the unusually 

large decline in the labor force participation rate that is 

currently holding down unemployment. After accounting 

for those developments (as described below), CBO estimates that cyclical economic weakness is currently keeping the unemployment rate roughly 1 percentage point 

above what it would otherwise be.

Structural Factors. Structural factors raise both the actual 

rate of unemployment and the natural rate of unemployment. CBO estimates that structural factors accounted 

for roughly 1 percentage point of the difference between 

the unemployment rate at the end of 2007 and at the end 

of 2013. CBO also estimates that the natural rate of 

unemployment was 5 percent at the end of 2007 and, 

reflecting those structural factors, was 6 percent at the 

end of 2013.10 Three structural factors, according to 

CBO’s analysis, account for that 1 percentage-point 

increase:11

 About one-half of a percentage point is attributable to 

the stigma of long-term unemployment (which may 

cause employers to be less inclined to hire someone 

who has been out of work for a considerable period, 

8. An alternative perspective on the increase in the unemployment 

rate since 2007 is offered in Casey B. Mulligan, The Expanding 

Social Safety Net, Working Paper 17654 (National Bureau of 

Economic Research, December 2011), www.nber.org/papers/

w17654, which asserts that various changes in federal policies 

since 2007—such as extensions of unemployment insurance—

increased the effective tax rate on labor income and thereby were 

primarily responsible for the sharp increase in unemployment 

during the recession and have slowed the subsequent recovery in 

the labor market. See also Casey B. Mulligan, The Redistribution 

Recession: How Labor Market Distortions Contracted the Economy 

(Oxford University Press, 2012). For an opposite view, see 

Jesse Rothstein, “The Labor Market Four Years into the Crisis: 

Assessing Structural Explanations,” Industrial and Labor Relations 

Review, vol. 65, no. 3 (March 2012), pp. 467–500, http://

tinyurl.com/ppan3j3.

9. That roughly 4 percent shortfall is the difference between the 

estimate of GDP produced by the Bureau of Economic Analysis 

(BEA) and CBO’s current estimate of potential GDP. BEA’s 

estimate was released on January 30, 2014, after CBO completed 

its projection. According to BEA’s release, GDP in the fourth 

quarter of 2013 was greater than what CBO had projected. 

Incorporating that higher level of GDP would probably raise 

CBO’s estimate of potential output, but only slightly.

10. For use in its analysis of potential output, CBO also estimates an 

underlying long-term rate of unemployment that incorporates 

only long-lasting structural factors (discussed below). CBO uses 

its estimate of the natural rate to analyze inflation, among other 

purposes; for any actual unemployment rate, a higher natural 

rate is an indication that employers have more difficulty hiring 

workers, so growth in wages will tend to be higher and upward 

pressure on inflation will be greater.

11. For a more detailed discussion of the structural factors and related 

estimates for an earlier period, see Congressional Budget Office, 

Understanding and Responding to Persistently High Unemployment

(February 2012), www.cbo.gov/publication/42989. 
8 THE SLOW RECOVERY OF THE LABOR MARKET FEBRUARY 2014

CBO

out of concern that the person might be a less 

desirable worker) and the erosion of workers’ skills 

that can attend long-term unemployment.

 About one-half of a percentage point is attributable to 

a decrease in the efficiency with which employers 

filled vacancies, probably at least in part as a result of 

mismatches between the needs of employers and the 

skills and locations of those seeking work.

 About one-tenth of a percentage point is attributable 

to the incentives generated in 2013 by extensions 

of UI benefits (from the usual 26 weeks to as much 

as 99 weeks), primarily because the program’s rules 

led some people to remain in the labor force and 

to continue to search for work in order to 

remain eligible. (The effect of that factor on the 

unemployment rate was greater in earlier years 

during and after the recession when more people 

were receiving extended benefits.) 

Evidence that factors other than weakness in overall 

demand for goods and services are boosting the unemployment rate comes in part from a shift in what is 

known as the Beveridge curve—the relationship between 

the job vacancy rate (the ratio of openings to total 

employment) and the unemployment rate (see Figure 9). 

That shift, an increase in the unemployment rate for any 

given job vacancy rate, suggests either that unemployed 

workers are facing unusual difficulties finding suitable 

work in the available jobs (as would result from the difficulties faced by the long-term unemployed or from a 

decrease in the efficiency with which employers and job 

seekers are matched) or that the labor force is growing for 

reasons that are unrelated to the strength in the economy 

(as would result from extensions of UI benefits).12

Stigma and the Erosion of Skills. Long-term unemployment can lead to subsequent difficulties in securing work. 

The stigma of being out of work for an extended period 

tends to worsen employment prospects. Another barrier 

is created by the erosion of skills that can come from 

long-term unemployment. Although the extent to which 

those factors increased unemployment during and after 

the recession is difficult to quantify, the probability of 

finding a job is significantly lower for the long-term 

unemployed than it is for people who have spent less 

time out of work. On the basis of that finding and other 

Figure 9.

Beveridge Curve: Relationship Between 

Job Vacancies and Unemployment

(Total job vacancy rate, percent)

Sources: Congressional Budget Office; Bureau of Labor Statistics.

Notes: The job vacancy rate is the number of job openings, 

expressed as a percentage of the sum of total nonfarm 

employment plus job openings.

The unemployment rate is a measure of the number of 

jobless people who are available for and actively seeking 

work, expressed as a percentage of the labor force.

Data are monthly and are plotted from January 2001 

through November 2013.

findings in research, CBO estimates that the stigma and 

erosion of skills arising from the unusually large number 

of the long-term unemployed accounted for about onehalf of a percentage point of the net increase in the 

12. Recent research offers a variety of views on the structural factors 

that explain the shift in the Beveridge curve. For example, one 

report focuses on a combination of less efficient matching of 

job seekers with employers in the labor market, the effects of 

extensions of UI benefits on the incentives to look for work, 

and other factors; see Mary C. Daly and others, “A Search and 

Matching Approach to Labor Markets: Did the Natural Rate of 

Unemployment Rise?” Journal of Economic Perspectives, vol. 26, 

no. 3 (Summer 2012), pp. 3–26, http://tinyurl.com/olxa6b4. 

Other research, however, indicates that the increase in the number 

of the long-term unemployed accounted for the entire shift in the 

curve (either directly or through the effects of extensions of UI 

benefits); see Rand Ghayad and William Dickens, What Can We 

Learn by Disaggregating the Unemployment–Vacancy Relationship? 

Public Policy Brief 12-3 (Federal Reserve Bank of Boston, 

October 2012), http://tinyurl.com/qjbnv2s.

Jan.

2001

0

1

2

3

4

0 4 5 6 7 8 9 10 11

Unemployment Rate (Percent)

Nov.

2013

July

2009
FEBRUARY 2014 THE SLOW RECOVERY OF THE LABOR MARKET 9

CBO

unemployment rate from the beginning of the recession 

to the end of last year.13 That effect has grown over time, 

and CBO expects it to persist for several years before 

gradually abating, as some of the long-term unemployed 

either retire or leave the labor force in some other way 

and as others eventually obtain stable jobs.

Matching Unemployed Workers With Available Jobs. In 

well-functioning labor markets, job seekers and employers efficiently find mutually beneficial matches. Individual businesses grow and shrink in response to fluctuations 

in profitability and in the demand for their products; 

workers change jobs as they look for and find positions 

that best fit their skills and interests; and improvements 

in technology, changing consumer preferences, and 

changes in international trade have disproportionate 

effects on various industries, occupations, and locations 

of work. The need for workers to move from one industry or occupation to another, to acquire new skills to 

facilitate such a shift, or to relocate to find new work 

often is characterized as a skill or locational mismatch, 

and such mismatches always result in some amount of 

unemployment as businesses with vacancies and workers 

looking for jobs take time to find good matches. That 

normal mismatch is one component of CBO’s estimate of 

the natural rate of unemployment, which was 5 percent 

before the recession.

Mismatches can become more important when unusual 

advances in technology or shifts in the demand for 

various products require significant changes in the 

distribution of workers among industries, occupations, 

or locations. For example, because the demand for 

construction workers declined sharply during the recession as a result of the collapse of the housing market, 

many affected workers sought employment in other occupations. Separately, some of the increase in the difficulty 

of matching unemployed workers with available jobs 

appears to have occurred because employers are recruiting 

less intensively than they have in the past to fill vacant 

jobs, independent of any changes in the suitability of the 

pool of candidates.14

CBO estimates that increased difficulties matching workers with jobs accounted for about one-half of a percentage 

point of the net increase in the unemployment rate from 

the beginning of the recession to the end of 2013. That 

effect will diminish gradually over the next few years, in 

CBO’s judgment, as the causes of dampened matching 

efficiency recede and as workers acquire new skills, 

shift to faster growing industries and occupations, or 

relocate to take advantage of new opportunities.

Extensions of UI Benefits. In response to the high 

unemployment caused by the recession, legislation to 

provide emergency unemployment compensation (EUC) 

was enacted that allowed states to provide additional 

weeks of federally funded unemployment benefits to 

people who had exhausted their regular state benefits.15

In CBO’s judgment, those expansions had several effects 

on unemployment and on employment.

First, the availability of EUC discouraged some recipients 

from taking jobs they considered unsuitable because 

the additional benefits reduced the hardship of being 

unemployed, and the legislation required recipients to 

continue to search for employment and to remain in the 

labor force in order to continue to receive benefits. 

Although those incentives increased unemployment 

13. Some researchers have found that employers are less likely to 

respond to a résumé from an applicant who has been unemployed 

for more than six months than to an otherwise identical résumé 

from an applicant who has been unemployed for a shorter period. 

See, for example, Rand Ghayad, “The Jobless Trap” (draft, 2013), 

http://tinyurl.com/ob6laqz (PDF, 733 KB); and Kory Kroft, 

Fabian Lange, and Matthew J. Notowidigdo, Duration 

Dependence and Labor Market Conditions: Theory and Evidence 

From a Field Experiment, Working Paper 18387 (National 

Bureau of Economic Research, September 2012), www.nber.org/

papers/w18387. See also Martin Biewen and Susanne Steffes, 

“Unemployment Persistence: Is There Evidence for Stigma 

Effects?” Economic Letters, vol. 106, no. 3 (March 2010), 

pp. 188–190, http://tinyurl.com/pwumhpl; and Marianne 

Bertrand, Claudia Goldin, and Lawrence F. Katz, “Dynamics 

of the Gender Gap for Young Professionals in the Financial 

and Corporate Sectors,” American Economic Journal: Applied 

Economics, vol. 2, no. 3 (July 2010), pp. 228–255, 

http://tinyurl.com/nh94ysq.

14. See Steven J. Davis, R. Jason Faberman, and John C. Haltiwanger, 

Recruiting Intensity During and After the Great Recession: National 

and Industry Evidence, Working Paper 17782 (National Bureau of 

Economic Research, January 2012), www.nber.org/papers/

w17782.

15. In addition, lawmakers enacted other temporary provisions to aid 

the unemployed, including special provisions that made it easier 

for states to pay benefits under the extended benefits program 

(from February 2009 through December 2013) and a weekly 

supplement of $25 that was available to people receiving regular, 

emergency, and extended benefits (from February 2009 through 

December 2010). 
10 THE SLOW RECOVERY OF THE LABOR MARKET FEBRUARY 2014

CBO

among recipients, the weight of the evidence suggests that 

their effect was small.16

Second, the availability of EUC affected the employment 

of prospective workers who were ineligible for benefits, 

such as new entrants and reentrants to the labor force. To 

the extent that beneficiaries were less likely to accept 

available jobs, those who were unemployed but not 

receiving benefits were more likely to obtain and accept 

job offers. Given the elevated unemployment rate, nearly 

all of the jobs that were not taken by people receiving 

EUC were instead taken by others who were searching for 

work, in CBO’s view.

CBO estimates that those effects on incentives, taken 

together, had little effect on employment but, by 

boosting the number of people in the labor force, they 

increased the rate of unemployment by as much as onethird of a percentage point during the past several years. 

However, the size of the effects diminished in 2013, as 

the number of people exhausting their regular state 

benefits declined and as new legislation trimmed the 

availability of EUC; by the fourth quarter of 2013, those 

effects boosted the unemployment rate by one-tenth of a 

percentage point, CBO estimates.

Separately, by putting money in the hands of people 

who spent much of it on goods and services, UI benefits 

increased the demand for workers to produce those goods 

and services, indirectly raising total employment compared with what it would have been otherwise. Taking 

into account the effects both on incentives and on 

spending, CBO estimates that in late 2013 the benefits 

provided by the EUC program raised employment by 

about 200,000.17 Combining that effect on employment 

with the increase in the labor force resulting from recipients’ continuing to look for work in order to receive 

benefits, CBO estimates that the extension of UI benefits 

had little net effect on the unemployment rate at the end 

of 2013.

Causes of Low Labor Force Participation

According to CBO’s analysis, the unusually low rate of 

labor force participation in recent years is attributable to 

three principal factors: long-term trends, especially the 

aging of the population; temporary weakness in employment prospects and wages; and some longer-term factors 

attributable to the unusual aspects of the slow recovery of 

the labor market, including persistently low hiring rates. 

Of the 3 percentage-point decline in participation 

between the end of 2007 and the end of 2013, CBO 

estimates, about 11⁄2 percentage points was the result of 

long-term trends, about 1 percentage point arose from 

temporary weakness in employment prospects and wages, 

and about one-half of a percentage point was attributable 

to unusual aspects of the slow recovery.

Long-Term Trends. During the past six years, the participation rate has declined by roughly 11⁄2 percentage points 

because of long-term trends, CBO estimates. That 

decline is attributable mostly to retirement of members of 

the baby-boom generation. The aging of that generation 

16. Such benefits have been the subject of research for several decades. 

A widely cited publication from 1990 shows that eligibility for 

an extra five weeks of benefits led, on average, to a one-week 

increase in the duration of unemployment; see Lawrence F. Katz 

and Bruce D. Meyer, “The Impact of the Potential Duration of 

Unemployment Benefits on the Duration of Unemployment,” 

Journal of Public Economics, vol. 41, no. 1 (February 1990), 

pp. 45–72, http://tinyurl.com/qyw7elf. A more recent publication 

suggests that most of that effect represented an expanded search 

effort, which ultimately could result in better matching of workers 

and jobs; see Raj Chetty, “Moral Hazard Versus Liquidity and 

Optimal Unemployment Insurance,” Journal of Political Economy, 

vol. 116, no. 2 (April 2008), pp. 173–234, http://tinyurl.com/

ozfs7uq. Most research focusing on the extension of benefits in 

recent years has revealed smaller effects and indicated that much 

of the increase in unemployment duration was among people who 

would otherwise have left the labor force, thus indicating that the 

increase in duration did not imply a decrease in employment. See 

Rob Valletta and Katherine Kuang, Extended Unemployment and 

UI Benefits, Economic Letter 2010-12 (Federal Reserve Bank of 

San Francisco, April 2010), http://tinyurl.com/mtfpx6j; Jesse 

Rothstein “Unemployment Insurance and Job Search in the Great 

Recession,” Brookings Papers on Economic Activity (Fall 2011), 

pp. 142–196, http://tinyurl.com/qgtgcuj; and Henry Farber and 

Robert G. Valletta, Do Extended Unemployment Benefits Lengthen 

Unemployment Spells? Evidence From Recent Cycles in the U.S. 

Labor Market, Working Paper 19048 (National Bureau of 

Economic Research, May 2013), www.nber.org/papers/w19048. 

In contrast, a preliminary study reports large negative effects on 

employment from the extension of benefits in recent years, 

reflecting employers’ responses to an increase in prevailing wages 

(albeit a relatively small one) that was necessary to attract UI 

beneficiaries to accept jobs. See Marcus Hagedorn and others, 

Unemployment Benefits and Unemployment in the Great Recession: 

The Role of Macro Effects, Working Paper 19499 (National Bureau 

of Economic Research, October 2013), www.nber.org/papers/

w19499.

17. See Congressional Budget Office, letter to the Honorable Chris 

Van Hollen concerning the ways in which extending certain 

unemployment benefits would affect output and employment in 

2014 (December 3, 2013), www.cbo.gov/publication/44929.
FEBRUARY 2014 THE SLOW RECOVERY OF THE LABOR MARKET 11

CBO

has increased the share of people who are age 55 or older 

and are thus less likely to work than younger people. 

In addition, underlying trends in the participation rate 

within groups of people of a given age or by sex have contributed slightly to the decline in the overall participation 

rate since 2007. For example, those trends suggest declining participation for people under 25 and roughly stable 

labor force participation rate for women in their prime 

working years (ages 25 to 54), which had risen rapidly 

from the 1960s to the 1980s. (CBO expects that, in coming years, the aging of the population will continue to 

push down the overall participation rate but underlying 

trends in the participation rate within groups will have 

little net effect on the overall participation rate.)18

Temporary Factors. During periods of cyclical economic 

weakness, a lack of good job opportunities discourages 

some people from searching for employment and encourages some people to stay in school instead of seeking 

work. As a result, the labor force participation rate tends 

to decline during economic downturns and rebound 

during recoveries.

The recent weakness in the economy has led to what 

CBO judges to be a temporary drop of roughly 1 percentage point in the participation rate since 2007. That 

decline corresponds to roughly 3 million people who 

have left the labor force or are staying out of it until more 

jobs are available. Continued recovery of the economy 

will increase the demand for workers, drawing those 

people back into the labor force. Thus, CBO projects 

that the dampening effect on labor force participation 

will have dwindled by 2018, a year after actual GDP is 

projected to return to its historical relationship with 

potential GDP.

A slight offset to that reduction in labor force participation comes from two other aspects of the recession and 

slow recovery. First, at the depths of the recession, when 

sharply falling prices for housing and equities caused a 

precipitous decline in wealth, a significant number of 

older people appear to have postponed retirement or 

otherwise stayed in the labor force to preserve or restore 

their financial well-being.19 Second, CBO estimates that 

the extension of UI benefits modestly boosted labor force 

participation (as discussed earlier).

Longer-Term Factors Attributable to Unusual Aspects 

of the Slow Recovery. The limited opportunities for 

unemployed job seekers in recent years will also have 

long-term effects on people’s participation in the labor 

force, especially on the participation of people who have 

been unemployed for a long time. The unusually protracted weakness in the demand for labor appears to 

have led some workers to become discouraged and permanently drop out of the labor force, a longer-term factor 

that CBO estimates accounts for about one-half of a 

percentage point of the decrease in the participation rate 

since 2007.

In part, the permanent withdrawal from the labor force 

among those unemployed workers is evident in a rise in 

the number of people applying for and receiving benefits 

from the Social Security Disability Insurance program, 

which provides benefits to nonelderly adults who have 

held jobs but who are judged to be unable to perform 

“substantial” work because of a disability.20 In CBO’s 

view, the difficulty of finding work during the past several 

years made it worthwhile for some unemployed people 

with moderate disabilities to apply for benefits rather 

than search for employment that would accommodate 

their disabilities. Indeed, the number of applications to 

the program averaged 2.8 million per year between 2009 

and 2013, up from an annual average of 2.2 million 

during the previous five years. Once enrolled, very few 

recipients leave the program to return to the labor force.

Other people also have left the labor force and will not 

return—in CBO’s view, because of the recession and slow 

recovery—without applying for disability benefits. For 

example, the weakness in the labor market has led some 

older workers to retire earlier than they otherwise would 

have and to remain out of the labor force permanently. In 

addition, some unemployed workers who were unable to 

find suitable new jobs chose alternative unpaid activities, 

18. For further discussion about underlying trends in labor force 

participation rates by age and by sex, see Congressional Budget 

Office, CBO’s Labor Force Projections Through 2021 

(March 2011), www.cbo.gov/publication/22011.

19. See Courtney C. Coile and Phillip B. Levine, “The Market Crash 

and Mass Layoffs: How the Current Economic Crisis May Affect 

Retirement,” B.E. Journal of Economic Analysis and Policy, vol. 11, 

no. 1 (April 2011), http://tinyurl.com/p6uqspw.

20. See Congressional Budget Office, Policy Options for the Social 

Security Disability Insurance Program (July 2012), www.cbo.gov/

publication/43421.
12 THE SLOW RECOVERY OF THE LABOR MARKET FEBRUARY 2014

CBO

such as caring for family members, and will remain out of 

the labor force permanently.

The effect of long-term factors on the participation rate 

that has stemmed from the recession and its aftermath—

inducing people to leave the labor force permanently—is 

expected to diminish slowly. Over time, those who have 

left for that reason will reach retirement age or otherwise 

come to a point at which they would have left the labor 

force regardless of the strength of the labor market. As the 

effects of the recession and its aftermath wane, future 

changes in labor force participation will be determined by 

long-run trends in demographics.

CBO’s Labor Market Projections for the 

Next Decade

CBO expects that, under current laws governing federal 

taxes and spending, the labor market will strengthen considerably during the coming years because of a continued 

economic expansion and a lessening of the structural factors that have weighed on employment. CBO projects 

that the unemployment rate will fall to 5.8 percent by the 

end of 2017 and to 5.5 percent by 2024, reflecting 

declines in both cyclical and structural unemployment. 

CBO also projects that the downward pressure on the 

labor force participation rate from the recession and 

slow recovery will abate but that demographic trends and 

federal fiscal policies will diminish labor force participation—leading to a further decline in that rate during the 

next decade.

Nevertheless, a strengthening economy and the growth of 

the population will cause payroll employment in the nonfarm business sector to increase from about 137 million 

at the end of 2013 to about 149 million at the end of 

2024, CBO projects. In addition, CBO anticipates that 

growth in real hourly labor compensation will pick up as 

the demand for workers increases. The agency also 

expects that the share of total income earned by labor will 

increase over the decade but will not reach its average 

level of the past few decades.21

Figure 10.

Actual and Natural Rates of Unemployment

(Percent)

Sources: Congressional Budget Office; Bureau of Labor Statistics.

Notes: The unemployment rate is a measure of the number of 

jobless people who are available for and actively seeking 

work, expressed as a percentage of the labor force. The 

natural rate is CBO’s estimate of the unemployment rate 

arising from all sources except fluctuations in aggregate 

demand.

Data are quarterly. Historical data are plotted through 2013; 

projections are plotted through 2024.

CBO’s labor market projections are constructed to lie 

in the middle of the distribution of possible outcomes, 

given the fiscal policies embodied in current law. Those 

projections are subject to many sources of uncertainty, 

and the outcomes could differ substantially from the 

projections.

Unemployment Rates

CBO expects the unemployment rate to decline over the 

next decade (see Figure 10), reflecting changes in cyclical 

and structural factors that have raised the unemployment 

rate since the beginning of the recession. The agency 

anticipates that, under current law, the unemployment 

rate will decline from the average of 7.0 percent in the 

fourth quarter of 2013, to 5.8 percent in the fourth quarter of 2017, and to 5.5 percent in 2024. The natural rate 

of unemployment is projected to decline from an estimated 6.0 percent at the end of 2013 to 5.6 percent in 

21. For further discussion of economic projections through 2024, see 

Congressional Budget Office, The Budget and Economic Outlook: 

2014 to 2024 (February 2014), Chapter 2, www.cbo.gov/

publication/45010.

0

2

4

6

8

10

12

2000 2005 2010 2015 2020

Natural Rate

Actual Rate

Historical Projected
FEBRUARY 2014 THE SLOW RECOVERY OF THE LABOR MARKET 13

CBO

the fourth quarter of 2017 and to 5.2 percent in 2024—

0.2 percentage points above its prerecession level.22

The projected decline in the unemployment rate through 

the end of 2017 reflects primarily the expected continued 

economic expansion, because the increase projected in 

the overall demand for goods and services will create a 

need for businesses to hire more workers. With the gap 

between actual and potential GDP anticipated to narrow 

to just one-half of a percent in the second half of 2017, 

the unemployment rate would be expected to drop considerably. However, CBO anticipates that this effect will 

be dampened because the improvement in labor market 

conditions will induce some of the people who have left 

the labor force to return to it.

The projected decline in the unemployment rate through 

the end of 2017 also reflects an expected waning of some 

of the structural factors that have raised unemployment 

since the beginning of the recession. The effect of the 

extension of UI benefits on the unemployment rate 

essentially ended with the expiration of that extension at 

the close of 2013. And the effect of unusually large problems in matching unemployed workers with available 

jobs—estimated at about one-half percentage point in 

late 2013—is expected to recede almost entirely by 2017 

(and to disappear by 2018). In contrast, the effects of 

stigma and erosion of skills—also estimated to have raised 

the unemployment rate by about one-half of a percentage 

point in late 2013—will continue to hamper the ability 

of the long-term unemployed who remain in the labor 

force to find work.

The projection of the small additional decline in the 

unemployment rate over the 2018–2024 period stems 

from CBO’s anticipation that the effects of stigma 

and skill erosion will wane as more of the long-term 

unemployed either leave the labor force or find jobs. Even 

Figure 11.

Historical and Projected Rate of 

Participation in the Labor Force

(Percent)

Sources: Congressional Budget Office; Bureau of Labor Statistics.

Notes: The rate of participation in the labor force is the percentage 

of the civilian noninstitutionalized population age 16 or 

older that is either working or available for and actively 

seeking work.

Data are quarterly. Historical data are plotted through 2013; 

projections are plotted through 2024.

in 2024, however, CBO expects that those effects will 

boost the unemployment rate by about one-quarter of a 

percentage point.

CBO projects that the unemployment rate will be about 

one-quarter of a percentage point above the natural rate 

in the latter part of the coming decade. That gap is not 

based on a forecast of specific cyclical movements in 

the economy; instead, it is based on CBO’s estimate 

that the unemployment rate has been, on average, higher 

than the natural rate since 1947 and, notably, during 

each of the past five business cycles. The difference arises 

because the shortfalls in output relative to CBO’s estimate of potential output during economic downturns 

have been larger and more frequent than the excesses 

during economic expansions.

Labor Force Participation

CBO projects that the labor force participation rate, 

which averaged 62.9 percent in the fourth quarter of 

2013, will be at the same level, on average, in 2014 but 

will fall to 62.5 percent by the end of 2017 and to 

60.8 percent by the end of 2024 (see Figure 11).

22. For use in its analysis of potential output, CBO also estimates an 

underlying long-term rate of unemployment that incorporates 

only long-lasting structural factors. Of the three structural factors 

discussed in this report, only the stigma and erosion of skills 

related to the long-term unemployed are expected to be 

sufficiently long lasting to be included in that underlying longterm rate. Thus, CBO estimates that the underlying long-term 

rate of unemployment was 5.0 percent before the recession, that it 

rose to 5.5 percent in 2013, that it will remain there through 2017 

because the effects of stigma and skill erosion will remain roughly 

constant over the next four years, and that it will then decline to 

5.2 percent in 2024 as those effects wane.

0

60

62

64

66

68

70

2000 2005 2010 2015 2020

Historical Projected
14 THE SLOW RECOVERY OF THE LABOR MARKET FEBRUARY 2014

CBO

For 2014 to 2017, CBO anticipates that many of the 

people who left the labor force because of a lack of job 

opportunities will return as labor market conditions 

improve and that the number of people who stay out 

of the labor force (for example, to attend school) will 

diminish. However, CBO expects, the cyclical recovery in 

participation will be more than offset by the downward 

pressure on participation stemming from other changes. 

The most significant effect will come from the aging of 

the population (and other demographic changes), but 

federal tax and spending policies will also play a role. 

The Affordable Care Act (ACA) will tend to reduce participation, with the largest impact stemming from new 

subsidies that reduce the cost of health insurance purchased through exchanges.23 Specifically, by providing 

subsidies that decline with rising income (and increase 

with falling income) and by making some people financially better off, the ACA will create an incentive for some 

people to choose to work less.24 The structure of the 

tax code—in which rising incomes push some people 

into higher tax brackets—will also reduce labor force 

participation slightly.

The further projected decline in the participation rate 

after 2017 primarily reflects the ongoing aging of the 

population, with smaller further effects of the federal 

fiscal policies just discussed. Those effects are offset in 

part by a reduction in the number of people who will 

have permanently stopped looking for work because of 

the recession and slow recovery; many of them would, by 

that period, have left the labor force anyway through 

retirement or by some other means. Still, CBO estimates 

that the lasting effects of the recession and slow recovery 

will depress labor force participation by 0.4 percentage 

points in 2024.

Employment

CBO’s projections for the growth of employment during 

the next decade reflect the agency’s projections of growth 

Figure 12.

Historical and Projected Share of the 

Population That Is Employed 

(Percent)

Sources: Congressional Budget Office; Bureau of Labor Statistics.

Notes: Data show the number of employed workers (as measured 

by the Current Population Survey) as a percentage of the 

civilian noninstitutionalized population age 16 or older.

Data are quarterly. Historical data are plotted through 2013; 

projections are plotted through 2024.

in the population and of the changes in the rate of labor 

force participation and the unemployment rate, described 

above.

Under current law, CBO expects, nonfarm employment 

will increase by about 7 million from the end of 2013 

to the end of 2017. That gain reflects a recovery in the 

demand for goods and services that will boost both 

labor force participation and businesses’ demand for 

labor as well as a gradual decline in the natural rate of 

unemployment as mismatches in the job market return 

to prerecession rates. Working in the opposite direction 

are demographic changes that will lower labor force 

participation. All told, CBO projects, the employmentto-population ratio will only edge upward, reaching 

58.9 percent at the end of 2017—just 0.4 percentage 

points above the ratio at the end of 2013 and well below 

the peak of 63.3 percent reached at the end of 2006 

and the beginning of 2007, before the recession (see 

Figure 12).

After 2017, the growth of employment slows somewhat 

more in CBO’s projections, as demographic changes 

continue to push the labor force participation rate 

23. As referred to in this report, the ACA comprises the Patient 

Protection and Affordable Care Act, the health care provisions of 

the Health Care and Education Reconciliation Act of 2010, and 

the effects of subsequent judicial decisions, statutory changes, and 

administrative actions.

24. For more information, see Congressional Budget Office, The 

Budget and Economic Outlook: 2014 to 2024 (February 2014), 

Appendix C, www.cbo.gov/publication/45010.

56

0

58

60

62

64

66

2000 2005 2010 2015 2020

Historical Projected
FEBRUARY 2014 THE SLOW RECOVERY OF THE LABOR MARKET 15

CBO

downward. CBO anticipates that, under current law, the 

employment-to-population ratio will fall to 57.5 percent 

in 2024.

Uncertainty of Projections

CBO’s labor market projections are subject to many 

sources of uncertainty. In keeping with its usual practices, 

CBO constructed its latest projections to lie within what 

it judges to be the middle of the distribution of possible 

outcomes, given the policies embodied in current law. 

Actual outcomes undoubtedly will differ from those 

projections in at least some respects.

One source of uncertainty regarding projections of the 

labor market concerns the growth in overall demand for 

goods and services. If demand increases more quickly or 

slowly than CBO projects, the labor market also will 

improve more quickly or slowly.

Another source of uncertainty derives from the natural 

rate of unemployment. If it is above CBO’s estimates, 

future employment and output will tend to be lower, but 

if the natural rate is lower than CBO’s estimates, future 

employment and output will tend to be higher.

A further source of uncertainty concerns the rate of labor 

force participation. One challenge in predicting that 

rate lies in interpreting how much of the decline in participation since 2007 will be reversed as labor market 

conditions improve. If more of the decline is permanent 

than CBO estimates, for example, employment will be 

lower in the long run than CBO projects. Another 

challenge lies in projecting the effect of the ACA on participation; if that legislation has more or less effect than 

CBO estimates, employment will differ in the long run 

from what CBO projects.
16 THE SLOW RECOVERY OF THE LABOR MARKET FEBRUARY 2014

CBO

About This Document

Each year, the Congressional Budget Office (CBO) issues a series of reports on the state of the budget 

and the economy. This study provides background information that helps to explain the economic 

projections included in those reports. In keeping with CBO’s mandate to provide objective, impartial 

analysis, this study makes no recommendations.

David Brauer and Charles Whalen of CBO’s Macroeconomic Analysis Division prepared the study, 

with guidance from Robert Arnold, Kim Kowalewski, and Wendy Edelberg. 

Christina Hawley Anthony, William Carrington, Devrim Demirel, Philip Ellis, Peter Fontaine, 

Daniel Fried, Joseph Kile, Mark Lasky, Joyce Manchester, Benjamin Page, Felix Reichling, 

Robert Shackleton, Emily Stern, David Weiner, and Christopher Williams—all of CBO—provided 

comments.

Alexander Arnon and Leah Loversky provided research assistance, Kate Kelly edited the report, and 

Maureen Costantino and Jeanine Rees prepared it for publication. An electronic version is available on 

CBO’s Web site (www.cbo.gov/publication/45011).

Douglas W. Elmendorf 

Director

February 2014