Labor slump is worse since Great Depression

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November 2003

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Labor slump is worse since Great Depression
Researchers at the Economic Policy Institute report that the 31-month period of job losses experienced in the United States has been the longest such period of sustained U.S. unemployment ever recorded. According to the EPI, even though the American economy has gained 286,000 jobs since July, it remains 2.4 million jobs below employment levels in March 2001, when the recession began.

That fact, grim as it is, is only part of what makes this current jobs slump one for the record books. The newly released data for October shows that last month's job growth, while very good news, is still significantly short of what is needed to stabilize the troubled labor market and stop the decline in real wages and salary income for American workers. According to the report, as much as 7 million jobs should have been created since the beginning of the recession in order to keep up with an expanding working age population in the United States.

"The drawn-out nature of this job market slump has put our rate of job creation very far behind the pace of population growth," explained Lee Price, an EPI research director. "With more people for fewer jobs, wages have continued to fall. It's encouraging to see jobs growing any amount again. But until we can reach and sustain job growth of at least 150,000 every month, there will be growing slack in the job market. And until that happens, we are unlikely to see the kind of healthy wage and income growth that can sustain a strong recovery."

A new analysis by Price examines the most recent recession and its 31-month aftermath, comparing it with previous recession-recovery cycles. "The Severity of the Current Labor Slump" also looks at the connections between population growth, employment, and unemployment rates to offer new insights on why the severity of this slump is so understated by many of the traditional measures.

"In many ways, the distress in the labor market is far worse than the standard indicators seem to show," says Price. "Unemployment has been higher in the past and job losses have been sharper, but we have never before spent so much time in such a long, deepening tunnel of job losses, with no clear light yet in view."

According to the report, a number of factors must be considered in order to understand the severity of the current labor slump:

• The record length of time that jobs have failed to recover—Prior to the current slump, jobs had never fallen over a two and a half year period since monthly job numbers began in 1939. As of October 2003, payroll jobs had fallen by 2.4 million below the level of March 2001.

• The growth in the working age population since the recession began in March 2001—Even as jobs were shrinking by 1.8 percent, the working age population (i.e., the number of people of working age) was growing by 3.4 percent. Had job growth kept up with working age population growth over that period, 6.9 million more payroll jobs would have been filled in October 2003.

• The effect of the “missing” labor market on the unemployment rate—The unusually prolonged loss of jobs has caused an unprecedented number of people to refrain from actively looking for work, and therefore to be excluded from the unemployment measurement. Had the labor force grown more in line with the population—as it has in past labor slumps—another 2.3 million people would have been in the labor force in October 2003. This “missing” labor force is significant because the unemployment rate would have been 7.4 percent had the 2.3 million “missing” workers been considered as unemployed.

The 7.4 percent unemployment figure provides a better measure of current slack in the labor market than the actual unemployment rate of 6 percent. The 1.4 percentage-point difference reflects the people pushed to the sidelines of the labor market who can be expected to seek work again once job prospects improve. As a result, the official unemployment rate should not be expected to fall very much when the employment picture actually begins to improve.

• The loss of wage and salary income—Although real hourly wages have grown since the start of the recession, those gains have been more than offset by declines in the number of jobs and the amount of hours paid per job.The U.S. labor market has remained mired in a slump since the recession began in March 2001.

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