The Weak Jobs Recovery: Whatever Happened to "the Great American Jobs Machine"?

1. Introduction During the 1990s, the U.S. labor market drew plaudits around the world for the large number of jobs it created. The rate of unemployment fell to levels below those of most other advanced economies and the percentage of the population in employment rose to its highest level in history, as even the less-skilled and former "welfare mothers" found jobs. At the same time, productivity grew smartly, real wages rose after decades of stagnation or decline, the seemingly inexorable rise of inequality ended, and poverty fell. Europe marveled at "the great American jobs machine" and sought solutions to its problems by looking at U.S. policies and practices. What a difference a few years make. More than three years have passed since the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) declared that the U.S. economy had begun its recovery. Yet compared with the past five recoveries, 3.1 million fewer people are working today than at the outset of the recovery. (1) Although by historical standards, the percentage of the employed population is high, it remains 2 percentage points lower than it did in spring 2000--the boom's peak. The weak jobs recovery since 2001 has created greater economic problems for Americans than Europe's sluggish job performance in the 1990s created for Europeans. The United States has only a limited safety net for workers. Those who lose their jobs risk losing health care or seeing their family drop from the middle class into poverty. This paper examines the operation of the U.S. labor market in the 2001 recovery. Because the United States is in the middle of the recovery, ours is a real-time analysis; thus, some conclusions could change if the recovery stalls or employment grows suddenly. For instance, since August 2003, nonfarm payroll employment increased by 2.5 million, for a monthly average of 146,000, while the household survey showed a comparable increase of 2.6 million. (2) However, seventeen months of job growth that barely kept pace with civilian population growth does not gainsay the surprising U.S. inability to generate jobs for so long in this recovery. It would take employment growth of some 300,00 per month over the next year and a half to bring the employment-population rate to the 64.4 level it held during 2000. 2. The Challenge of the Jobless Recovery "How come we see recovery every place but in the labor market?" (adapted from Robert Solow). Our first and most important finding is that the current recovery has been the worst in recent U.S. economic history in terms of job creation. Employment growth has been much slower than it has been in all post-World War II recoveries--including the 1990s recovery, when employment also took an extraordinarily long time to rebound (Chart 1). (3) Typically, employment growth lags business cycle recoveries by three to four months. In the 1990s recovery, the lag was a little more than two years. In the current recovery, the lag is three to four years and, at the time of our writing, the labor market has not yet clearly recovered. [GRAPHIC OMITTED] During the 2004 presidential campaign, it was natural that the Democrats stressed the lack of job growth while the incumbent Republicans downplayed the issue, directing attention at the relatively moderate rate of unemployment. However, as stated by Kevin Hassett, Director of Economic Policy Studies at the American Enterprise Institute for Public Policy Research: "It's not a partisan issue, it is a fact. The labor market is worse than in the typical recovery." (4) The poor recovery in the labor market goes beyond sluggish job growth. While the rate of unemployment has been moderate, the duration of joblessness has been high three years into the recovery, and an exceptional proportion of persons not participating in the labor market want to work (Schreft, Singh, and Hodgson 2004). …