Will High Unemployment Prevent Recovery from Recession?

One question I get in my speeches goes like this:

Won't our high unemployment rate prevent an end to the recession? After all, people out of work don't spend much money.

Think about this a moment. How did we ever get out of the recession of the early 1980s, when unemployment rose well above 10 percent?

Or how did we get out of the mid-1970s recession, when unemployment rose to nine percent? In a few years it had fallen beneath six percent. How did that happen?

It turns out that the economy has some self-correcting features in it. Also, policy may help extract us from recession. The self-correcting features include--believe it or not--consumer spending. The drop in consumer spending has been disproportionate to the decline in incomes. That is, most of the drop was due to employed people who were scared, rather than unemployed people. When the employed people realize that they have dodged the bullet, they start spending. So the key factor isn't so much the behavior of people out of work, but the behavior of those who still have their jobs.

Inventories also help correct the economy. Businesses have cut back on their inventories, forcing producers to cut back on their output. When businesses simply level out their spending, the economy will be relieved of a major negative.

One other self-equilibrating factor will not be at work this recovery. In recessions, interest rates typically fall, stimulating new housing construction. However, our excess housing inventory will prevent that from working this time round.

One last comment on unemployment: look carefully at the historic pattern and you'll see that the unemployment rate is a lagging indicator, meaning that it starts to improve after the overall economy is already improving. As such, it does not prevent the economy from improving.

If high unemployment prevented a recovery from recession, then we never would have recovered from our first recession. But we've recovered from it, and from every other recession.

There are plenty of things to worry about. The high unemployment rate preventing a recovery is not one of those things.

Comments

[Steven Hansen:]

All recessions end eventually.

what economists seem to be missing is the reason for the unemployment. why as a jobless "recovery" becoming a norm in modern recessions???

this recession will end but economists have lost the sight of jobs creation. that is why recoveries are now jobless. in this recession, it is possible we have shifted a shit-pot full of jobs to asia as we have decided that smoke stack industries belong in other countries.

where, pray tell, will the new jobs come from?

Jul 31 05:02 AM

[Davewmart:]

What is this article trying to tell us?
That recessions end sometime?
We all know that, the question is when it ends.
Unemployment is a lagging indicator, but hours worked by those in employment is not, as the first response to an upturn is to end short-time working, rather than taking the far more expensive step of making new hires.
Debt level wind-downs have barely started, and duff assets are being held on banks books awaiting the mythical upturn.
It will take many years of pain to achieve the re-balancing needed for a recovery.

Jul 31 06:56 AM

[jimboy:]

The tone of this piece is way too complacent: "don´t get too down, recessions have a way of correcting themselves" seems to be the message. Left to the free market recessions will correct but only after a painful but necessary cleansing of past excesses. Trouble is that previous downturns have been ended "early" by loose money policies luring consumers ever deeper in debt. These quick-fix recoveries leave weaknesses unaddressed and sew the seeds of the next recession. This time the quick fix is not available anyway - like a goose being force-fed corn the consumer (employed or not) has had enough debt.

Jul 31 07:08 AM

[Carlos Lam:]

There is another factor that may be in effect during the "recovery" this time: the 70 million Baby Boomers will naturally be spending less because they are aging (there's a negative correlation between spending & the golden years) and because they may need to sock away funds for retirement. I don't know for sure whether this will be the case, but logic tells us as much. If the Boomers resume their free-spending ways, I will be very surprised.

Jul 31 10:24 AM

[Pat C:]

Dr. Bill, I hope your are right but my instinct tells me you are dead wrong. I look at the conditions of our government(s), non-durable manufacturing, financial institutions funneling all their free money to their casino, corrupt politicians, 70%+ of our economy based on consumption, etc. etc. Employment is not "just a lagging indicator" - it is a before, during and after indicator and it rules! Nobody (particularly me) has a clue. This is NOT our parents or grandparents recession.

Jul 31 10:49 AM

[dondon:]

Steve Hansen wrote: Where, pray tell, will the new jobs come from?
Obviously he hasn't been listening. We have been told that the new jobs will be "green jobs". As soon as the government taxes to death everyone that produces an income, they will take the money and green jobs will magically appear.

Ye of so little faith.

Jul 31 02:27 PM

[kebu77:]

We have high energy prices at the bottom of the deepest recession since WW-II. The "oil tax" on this recovery will be at least double what it was from 2002 thru 2004, when the average price was about $30.

High govt deficit, trade deficit, personal debt, corporate debt = flat line economy if not a double-dip recession. No vigorous GDP growth for many years = long-term high UE rate.

Jul 31 03:16 PM