It takes just months for the labor market to fall apart but years to put it back together. A decade, even.
How do we know when it's all the way back, though? Well, it's not enough to look at the unemployment rate. The fact that it might be low by historical standards, after all, doesn't tell you whether it's as low as it could be by today's standards. To get a better sense of that, you have to broaden your perspective to include the type of raises people are getting, how comfortable they feel quitting their jobs and how many of them are ending up long-term unemployed. Those and other factors give you an idea of the balance of power between employers and would-be employees. And by those measures, the job market, for all its manifest progress, still has a ways to go before it's working for everyone.
Take long-term unemployment. It is, as I've said before, a particularly high-stakes game of musical chairs. The simple story is that the more unemployed people there are for every job opening, the more likely it is that some of them won't be able to find anything, even after six months — at which point companies will start screening out their résumés. And that's indeed what we've seen: The odds of becoming long-term unemployed have gone up and down with the unemployment rate itself.
Specifically, the unemployment rate at the time that someone starts a job search explains about 87 percent of the chances that they'll end up long-term unemployed. When joblessness is below 5 percent, those odds are about 5 to 10 percent, but when it's more than 9 percent, they can be as much as 25 to 30 percent.
This might be the best argument there is for stimulus. That's because a recession is really just a market failure that consigns people who would normally be able to find a job pretty quickly to a long spell of unemployment in the best case and to premature retirement in the worst. It makes sense, then, for the government to do everything it can to keep the economy from tossing aside some of our most valuable resources — ourselves — for no reason other than bad luck.
This logic, of course, is just as true when unemployment is 5 percent as it is when it's 10 percent. Which is to say that policymakers shouldn't take their foot off the gas just because things aren't terrible anymore. Maybe they could, you know, get even better. All you have to do is look at the late 1990s to see that not all sub-5 percent unemployment is created equal. Back then, the odds that a newly unemployed person still would be six months later were 5.9 percent. Today, it's 9.8 percent.
Now, this might not sound like that big of a difference, but think about it like this: It means that 65 percent more people are falling through the labor market's cracks during what are supposed to be the good times. Not that this is a new problem. The odds that someone would end up long-term unemployed were a nearly identical 9.7 percent during the height of the housing bubble, too. We've been waiting almost 20 years, then, for workers to have it as good as they did back when we thought that Beanie Babies and tech stocks were going to make us all rich.
Some of this is hard to explain, but a lot of it isn't. The easy part is that the labor market was in better shape in the late 1990s than it has been at any time since. It wasn't just that the unemployment rate was a little lower than it is even now, but also that workers had a lot more bargaining power. This isn't the most satisfying of answers, however. It amounts to saying that things were better because they were better.
But why aren't they today? Unemployment has finally fallen far enough that you would think we'd be starting to see some of the same things happen now, but we aren't. Wages aren't rising much faster, and workers aren't finding jobs more easily. It could just be that, even 10 years later, we haven't fully escaped the shadow of the Great Recession, and there are still more people who want jobs than the unemployment rate is telling us. If that's the case, then things might pick up soon. Or it could be, as Bloomberg View's Noah Smith argues, that employers are in such a strong position that they can dictate terms instead of negotiating them. That would mean that unemployment might need to get down to, say, 3.5 percent for workers to get the benefits that they used to when it was 4 percent.
Whatever it is, though, it's a reason for the Federal Reserve to be even more patient about raising interest rates. There's no need to cool off the labor market when it isn't overheating.
That's one of the most important parts of fixing the economy: not stopping because you think you should be done.