Wednesday, March 14, 2012

The Great Recession - Economic Policy Institute

The Great Recession—which officially lasted from December 2007 to June 2009—began with the bursting of an 8 trillion dollar housing bubble.  The resulting loss of wealth led to sharp cutbacks in consumer spending.  This loss of consumption, combined with the financial market chaos triggered by the bursting of the bubble, also led to a collapse in business investment.  As consumer spending and business investment dried up, massive job loss followed.  In 2008 and 2009, the U.S. labor market lost 8.4 million jobs, or 6.1% of all payroll employment.  This was the most dramatic employment contraction (by far) of any recession since the Great Depression. By comparison, in the deep recession that began in 1981, job loss was 3.1%, or only about half as severe.


Even after the economy stopped contracting in the summer of 2009, its growth has not been nearly strong enough to create the jobs needed simply to keep pace with normal population growth, let alone put back to work the backlog of workers who lost their jobs during the collapse. In the post-World War II recessions before the early 1990s, it took an average of 10 months for the economy to regain the jobs it had lost during the recession.  But after the early 1990s recession, it took nearly two years, and after the early 2000s recession, it took over three-and-a-half years. Unfortunately, the recovery from the Great Recession is following the sluggish pattern of these last two recoveries, but likely with an even longer timeline.  In October 2010, 16 months after the official end of the recession, the economy still had 5.4% fewer jobs than it did before the recession started.  Thus, the Great Recession has brought the worst of both worlds: extraordinarily severe job loss, combined with an extremely sluggish recovery.

The job loss during the Great Recession has meant that family incomes have dropped, poverty has risen, and adults as well as children have lost health insurance. The bursting of the housing bubble and the drop in the stock market has meant that family wealth has dropped dramatically, as well. This feature highlights the impact of the Great Recession on the labor market and on working families.

Job loss in the Great Recession was by far the most severe of any recession since WWII.  In the two years from December 2007 to December 2009, the labor market shed 6.1% of all payroll employment.  By comparison, in the deep recession that began in 1981, job loss, at 3.1%, was about half as severe. 
While the peak unemployment rate was slightly higher in the 1981 recession than in the Great Recession, the increase in unemployment associated with the Great Recession was the largest increase in any recession in 70 years.

Racial and ethnic minority workers tend to have much higher unemployment rates than white non-Hispanic workers.  For example, the black unemployment rate is generally around twice as high as the white unemployment rate, regardless of whether the economy is in an expansion or a recession.  This means that during recessions, black workers experience much larger increases in unemployment. 


It is impossible to capture the strength or weakness of something as complicated as the U.S. labor market with one number.  Therefore, it is important to look not just at the unemployment rate, but also at a host of measures of labor market health.

The chart above shows a more comprehensive measure of labor market slack than the unemployment rate.  It includes not just the officially unemployed, but also “involuntary part-time” workers—those who want a full-time job but have had to settle for part-time work; and “marginally attached” workers—workers who want a job, are available to work, but have become so discouraged that they have stopped actively seeking work and are consequently not counted as officially unemployed.

Around 27 million workers—roughly one out of every six U.S. workers—are either unemployed or underemployed.   Importantly, this is a very conservative measure of the total number of underemployed because it does not include workers who have had to take a job that is below their skill or experience level.
The Great Recession has broken all records related to duration of unemployment. The chart below shows the share of the unemployed who have been jobless for more than six months.  This share has been over 40% for all of 2010, far above its prior peak of 26% in the summer of 1983.

Once workers gets laid off from a job in this labor market, the odds are stacked strongly against them finding another one anytime soon.


Job seekers outnumber job openings by a significant margin—in September 2010, the ratio was 5 to 1.  Importantly, this isn’t the number of applicants per job opening—that number is much higher, as one unemployed worker applies for many jobs.  The 5-to-1 ratio means that for four out of every five unemployed workers, there literally are no jobs.  That is actually a substantial improvement over late 2009, but it is still far higher than the worst month of the previous recession and over three times as high as in 2007, before the Great Recession started.

This chart shows payroll employment over the 2000s.  As of September 2010, the U.S. labor market still had 7.8 million fewer jobs than it did when the recession started in December 2007.  But importantly, because the population is naturally increasing all the time, the U.S. labor market must add around 100,000 jobs every month just to keep the unemployment rate stable.  From December 2007 to September 2010, the labor market needed to add around 3.4 million jobs simply to keep pace with population growth, creating a combined jobs hole (population growth plus jobs lost) of over 11 million jobs in that time.  To fill in that gap in five years, the labor market would have to add around 300,000 jobs per month for that entire period.
While the previous figures have shown that, on aggregate, we have a huge jobs deficit, could it also be true that the Great Recession has caused profound structural changes that the aggregate numbers are masking?  Is there evidence that part of today’s unemployment is the result of firms having job openings but can’t find appropriate workers?   This chart shows the number of unemployed workers and the number of job openings by sector.  If today’s unemployment is predominantly structural, then one would expect to find some sectors where there are many more unemployed workers than job openings, and some sectors where there are more job openings than unemployed workers.  In other words, for structural unemployment to be a key part of overall unemployment, one would expect to find labor shortages in some areas because employers with job openings couldn’t find suitable workers.  But there are no major sectors where that is happening—unemployed workers dramatically outnumber job openings in every sector.  In other words, the main problem of the Great Recession isn’t that the economy is lacking the right workers, but instead that it is, across the board, lacking jobs. 


The labor market is the foundation of income for the vast majority of families.  Family incomes are affected by weak labor markets, both through job loss and through hours and wage cuts for those who have work.  This chart shows median, or typical, household income, both overall and for working-age households.  The typical working-age household saw an income decline of $2,700 from 2007 to 2009.  Furthermore, given that this recession came on the heels of one of the worst business cycles (2000-07) on record in terms of job creation, the typical working-age household brought in roughly $5,000 less in 2009 than it did in the year 2000.   
Because racial and ethnic minorities are disproportionately hit by job loss in recessions, their incomes drop further than that of whites.  African Americans in particular have seen very large income declines during the Great Recession.

The Great Recession has seen a substantial rise in poverty.  In 2009, one in seven people were living in poverty, and one in five kids under the age of 18 was living in poverty.  Young kids have been the hardest hit, with nearly one in four children under the age of 6 living in poverty.

Racial and ethnic minority families are much more likely to be living in poverty than non-Hispanic workers, regardless of whether the economy is in an expansion or recession.  In the Great Recession, however, Hispanics in particular have seen large increases in poverty.  Roughly one in four Hispanics and African Americans are living in poverty.


With the bursting of the housing bubble, the decline in the stock market, and the weakness of the labor market, household wealth has taken a substantial hit in the Great Recession. The median net worth of whites fell by around a third from 2004 to 2007, dropping from around $150,000 to around $100,000.  The median wealth of blacks, historically much lower than that of whites, took an even bigger hit, dropping by over three-quarters, from around $10,000 to around $2,000.

As most Americans, particularly those under 65 years old, rely on health insurance obtained through the workplace, it is no surprise that employer-sponsored health insurance fell dramatically in the Great Recession.  The share of Americans under age 65 who are covered by employment-based health insurance fell from 62.9% in 2007 to 58.9% in 2009.  Some of that decline was offset by increases in public insurance coverage, but nevertheless in 2009 there were 50.7 million people, 7.5 million of them children, without any type of health insurance.

The last two recessions have been characterized by very slow labor market recoveries.  If job growth is similar to that of the last two recoveries (early 1990s and early 2000s), then the much greater scale of job loss in the Great Recession means it could be well into the next decade before we make up all the jobs lost.


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