By Annys Shin
Washington Post Staff Writer
Thursday, July 23, 2009
The recession is expected to end sometime this year, but it could take far longer before millions of unemployed Americans notice.
Federal Reserve Chairman Ben S. Bernanke told congressional lawmakers during two days of testimony this week that he expects the economy to start adding jobs by the end of the year but it will take a while for the unemployment rate to go down.
Fed leaders in their latest forecast released earlier this month said the unemployment rate, now at 9.5 percent, could hit double digits by the end of the year.
Unemployment typically keeps rising even after recessions end as employers hold back on hiring until they are sure a recovery is underway. But economists worry that the worst recession of the post-World War II era could be followed by what they call a "jobless recovery," where output, or the gross domestic product, increases steadily while employment lags behind.
"We do expect to see positive job creation near the end of this year, early next year, but it's going to take a while, given the pace of growth, for the unemployment rate to come back down to levels that we would be more comfortable with," Bernanke told lawmakers Tuesday. "So, in that respect, it should take some time for the labor market to return to normal."
Jobless recoveries followed the previous two recessions in the early 1990s and 2000s. In the 18 months that followed the 1991 recession, payroll employment increased less than 1 percent. In the same period after the 2001 recession, payroll employment fell by less than 1 percent. By contrast, over the 18 months after the 1982 downturn, payroll employment rose more than 6 percent.
Economists are watching closely for any changes in productivity to see whether the pattern of the previous two recessions will be repeated. Surges in productivity followed the last two recessions, making it possible for employers to postpone hiring.
"If productivity growth is rapid, it means employers have discovered ways to produce more goods and services in the same hours. They don't need to add to payrolls," said Gary Burtless, an economist with the Brookings Institution. "It takes a bigger increase in GDP in order to generate a robust improvement" in unemployment.
It would take a booming economy to persuade Mark Scott, president of Mark IV Builders, to put out the help-wanted sign again. He has kept his home building and remodeling firm in Bethesda alive over the past 18 months by cutting his workforce from 26 to 10 people, getting rid of perks such as subsidies for continuing education courses and scrutinizing every payment that goes out the door.
"We're more efficient. And the stress of that is pretty high," he said. "Can we do it long term? I guess we have to do it as long as we can."
A jobless recovery is not necessarily inevitable, said Robert Shimer, an economist at the University of Chicago, who noted that the last two recession were much milder than the current one. The recession of the early 1980s, which is closest in severity and duration to the current one, was followed by strong job growth. "Why should we be sure that [the current downturn] will look more like the recent episodes?" he said.
Some employers are gearing up to hire again. Jim Zawacki, the owner of GR Spring & Stamping, an auto supplier based in Grand Rapids, Mich., has had to lay off a third of his workforce, slash the workweek from 40 to 32 hours, give up his company car and take an 80 percent salary cut. But he has been able to pick up business from other competitors that have gone under. He said he could start hiring if business that has been booked for later in the year comes through.
"As long as [customers] don't cancel or slow down . . . we should start seeing [improvement] in September," he said.
Jobless recoveries might be easier to predict if economists better understood their causes. For now, theories abound. Some economists suggest such recoveries have something to do with structural shifts in the economy; others blame the burden of rising health-care costs on employers.
This recession has its own quirks that lead some economists to think a jobless recovery is more likely.
The economy has shed more than 6 million jobs since the downturn began in December 2007. Taking population growth into account, the economy will have to add about 8.8 million jobs to restore employment to pre-recession levels, the Economic Policy Institute has estimated. But many of the usual engines of economic growth are stalled. Businesses have more capacity -- equipment, locations, inventory -- than they know what to do with and thus little reason to invest. Consumers who have lost a record amount of wealth have shut their wallets. The global slump means less demand for U.S. exports.
In addition, the collapse of the housing market has also slowed migration in the United States, which in the past has helped bring down unemployment as workers relocate for jobs, said Harvard economist Larry Katz. Falling home prices have made it harder to sell and forced more people to stay put. And the housing meltdown has hurt Sun Belt economies such as Florida and California that until recently were a haven for Rust Belt refugees.
The recession has also produced a record number of so-called "involuntary" part-timers who would work more hours if they could. That could delay hiring, economists say, because employers tend to increase hours of existing employees before adding workers.
Scott, the owner of Mark IV, said that is what he will do if business picks up. "I would put my guys on overtime before I'd hire additional for quite a while," he said.
Staff writer Neil Irwin contributed to this report.