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Why Joblessness Keeps Rising Even As Economies Improve

People wait to apply for jobs outside the Department of Labor in the Bronx, New York, earlier this year.
People wait to apply for jobs outside the Department of Labor in the Bronx, New York, earlier this year.
First the good news. There’s growing evidence the global economy is on the mend.

Now the bad news. Even if growth returns, more and more people will find themselves out of work -- at least in the short- to medium-term.

In the United States, the Congressional Budget Office expects unemployment to peak at 10.4 percent by the middle of next year – even though it forecasts the economy to start growing in the second half of 2009.

In the eurozone, unemployment hit a record 9.5 percent in July and is expected to continue rising, even as its biggest economies – France and Germany – have already emerged from recession.

“Historical data and experience of past crises point to a four- to five-year lag time between growth and employment recovery," Juan Somavia, the director-general of the UN’s International Labor Organization, said at a recent meeting. "If you put all that together, we’re looking at a potential jobs crisis of six to eight years.”

As Somavia puts it, an improvement in unemployment typically “lags” behind one in growth. But why so?

Waiting To See For Sure

One reason is that even once a recession comes to an end, it can take a long time for an economy to get back to where it was before.

So, say, even if firms’ revenues are better than they were, they might still take a while to get back to pre-recession levels.

That means firms will likely wait until they’re sure the good times are back before they start hiring. And in the meantime, they won't replace people who retire or leave.

So more people are looking for jobs that are harder to find.

“Firms are unwilling or in some cases unable to sack workers when things are going bad," says Richard Jackman, an expert on labor markets at the London School of Economics. "So when the recovery starts, they very often have more workers than they actually need in relation to current output levels.

"They also often have gone through a period of depressed profits. They haven’t got any money. They can’t start hiring more workers. They’re still looking for ways to cut costs to rebalance the books after having gone through a recession.”

Even when an economy starts growing, that growth can be too slow to bring down unemployment.

In the United States, for example, you have a growing working-age population and productivity growth.

That means more people are looking for jobs, and firms are able to produce the same level of output as before – but with fewer workers.

“The U.S. economy is not expected to grow at at least 3 percent. The economy must grow at 3 percent in order for unemployment to go down," says Peter Morici, a professor of international business at the University of Maryland. "Quite simply, we have 2-percent productivity growth and 1-percent labor force growth, or growth in the adult population. So if we are not going at 3 percent, we go backwards [with employment].”

'Lagging' Indicator

Another reason unemployment tends to keep rising -- strange though it might seem -- is that when an economy comes out of recession, jobless people become more optimistic about their chances of finding work.

The reason that increases a jobless rate is because standard unemployment measures count only people “actively seeking” work – and not those so discouraged they stop searching.

“People just stop looking for work because they know they won’t be able to find it," Jackman says. "And when the labor market improves, some of these workers come back into the unemployment measure because they do start looking for work.”

It’s said that unemployment is a “lagging” indicator, meaning it tells us more about what’s been happening in an economy than where it’s likely to go in the future.

Small comfort, though, for all those joining the swelling ranks of unemployed over the next year.