Why it May Take Almost Seven Years for Unemployment to Reach Five Percent

Economist Mark Thoma writing over at CBS Money Watch on Why it May Take Almost Seven Years for Unemployment to Reach Five Percent  

How long will it take the unemployment rate to go back down to 5 percent? A rough estimate can be obtained by looking at the rate of decline in the unemployment rate after recent recessions:

1. In the 1981-82 recession, unemployment peaked at 10.8 percent in November and December of 1982. Starting from December, it took 75 months (6 and one quarter years) for the unemployment rate to reach 5 percent (it’s lowest point before beginning to increase again). Thus, unemployment moved by (10.8-5)/75 = .077 percent per month.

2. In the 1990-91 recession, unemployment peaked at 7.8 percent in June of 1992 (unemployment peaked after the recession ended). It hits 5.1 percent in August 1996, 50 months later. After that, it hovers slightly above 5 percent before reaching 5.1 in April of 1997 then 4.9 percent in May of 1997. Call it 50 months to be conservative in terms of the recovery time. Note also that unemployment hits 4.0 percent in December 1999, 90 months after the peak (7 and a half years).

What is the rate of decline? To get to 5.1 percent, the unemployment rate moved (7.8-5.1)/50 = .054 percent per month. To get to 4 percent, the unemployment rate moved (7.8-4)/90 = .042 percent per month.

3. In the 2001 recession, the unemployment rate peaked at 6.3 percent in June of 2003. It reaches 5 percent in July of 2005, 25 months later, and it reaches 4.5 percent in September 2006, 39 months later. The associated rates of decline are (6.3-5)/25 = .052 percent per month, and (6.3-4.5)/39 = .046 percent per month.

 

Implication: Taking the fastest rate of decline in each case, i.e. .077 percent, .054 percent, and .052 percent, the average rate of decline in the unemployment rate over the last three recessions is .061 percent

 

Using this figure, and starting from an unemployment rate of 10 percent — the rate that exists today — how long would it take for the unemployment rate to get to 5 percent?

Answer: (10-5)/.061 = 81.8 months, or almost 7 years. (Getting to 6% would take 65.5 months, or just short of 5 and a half years.)

However, there’s an important qualification. The time can be shortened with effective policy. Since seven years is far, far too long to wait to return to something like full employment, and since we have the means to do something about it, we should move quickly to give labor markets the boost that they need.

 

Posted via email from Jim Nichols