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Sunday, March 06, 2011

How Long Until We Reach Full Employment?: Using the Last Two Recessions as Guides

Comments to this post have pointed out what I tried to acknowledge in the write-up, the forecasts of how quickly unemployment will recover present a relatively optimistic case. Though it didn't come through very well, that was part of the point. Even with an optimistic outlook, the return to full employment will take a long, long time. (See also Brad DeLong's comments.)

However, a more pessimistic outlook is likely warranted. Suppose that instead of looking over the entire sample to make the forecasts, as in the last post, we restrict our attention to just the last two recoveries.

Again, taking a quick, back of the envelope approach, the rate of recovery from the peak unemployment rate of 7.8% in June of 1992 through the trough of 3.8% in April of 2000 was, on average, a -0.04255 change per month. From the peak of 6.3% in June of 2003 through the trough in 4.4% in October of 2006, the average rate of change per month was -0.04750.

Averaged over both periods, the rate of decline was -0.04403 per month. This is the rate used to construct the forecasts shown by the dotted red lines in the figure. (Both the in-sample and out-of-sample forecasts are shown. The out-of sample forecast begins at the peak of 10.1% in November of 2009 to be consistent with the way the rates of change are constructed. In the previous post the forecast began the period after the end of the sample.):


The resulting forecast is truly scary. Here are updated versions of the benchmarks in the previous post:

7% unemployment in August of 2015
6% unemployment in June of 2017
5% unemployment in May of 2019
4% unemployment in April of 2021

Thus, if we recover at the same pace as in the last two recessions, something we certainly can't rule out, it will take more than six years to get to 6% unemployment rate, and until June of 2018 to get to 5.5%, the figure I cited in the last post as my best guess of the long-run natural rate.

So why are we sitting on our hands?

    Posted by on Sunday, March 6, 2011 at 03:33 PM in Economics, Fiscal Policy, Monetary Policy, Unemployment | Permalink  Comments (35)


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