How Do We Know When the Job Loss Recovery is Over?

Additional Resource: Bush Record Still Worst Since Hoover

The Bureau of Labor Statistics reported today that the labor market has created an unexpectedly large 308,000 new jobs in March. That is very welcome news. But just because job growth has shown signs of improvement – over the past four months job gains have accelerated from 8,000 to 308.000 – the labor market is not out of the woods yet. Not by a long shot. Reasonable benchmarks show that the economy currently still falls short by 2 to 5 million jobs. Thus it will take substantially faster employment growth and time before the job loss recovery ends. Faster employment growth, however, requires new policy ideas – not just tried and failed tax cuts for the wealthy.

So how do we know when the job loss recovery is over? The answer is a moving target as the economy and the working age population are continuously expanding.

One of the most modest benchmarks of where employment should be is simply that it returns to its pre-recession levels. After all, during that time the economy has expanded. Since the recession began in March 2001, the economy has lost 1.9 million jobs. If new jobs increase from this point onwards at the rate of job creation in March, it would take until October of this year before we recovered all of the lost jobs.

Another reasonable indicator is for employment growth to resemble that of the last recovery in the early 1990s, which was the weakest ever in terms of employment creation during the first 28 months of a recovery. Using this measure, employment is short 3.2 million jobs. Even if new jobs were created at the same pace as they did in March, it would take until August 2005 for the labor market to catch up.

A more ambitious standard is that the economy should create at least as many jobs as are needed to absorb population growth. That is, total nonfarm employment in March should have been 136 million, instead of the actual 131 million in March. Again, even if job creation kept the pace of March it would take three and a half years before there were enough jobs for all the new labor market entrants.

Finally, one could argue that the rise in the share of the employed population during the twenty years prior to the recession should have continued after the recession. In this case, the decline in the share of the working age population during the recession would be taken as a given. But once the recession ended, employment should have grown again so that the share of the employed population rose. Using this benchmark, the economy recorded a jobs shortfall of 5.4 million jobs in March 2004. If employment growth maintained its rate of March 2004, it would take four years before this standard was met.

All of these standards are reasonable and sensible. Other comparisons, like the average employment growth during all prior recoveries or a continuation in the increase of the employment to population ratio from the start of the recession, would show much larger shortfalls. All told, by any historical standard, the economy is lacking somewhere between 2 and 5 million jobs.

But let’s put history aside for a moment. One could also use past projections, often made in association with policy proposals, to gauge how well the economy is doing. When policy makers, such as President Bush, present their policy proposals, they often tie them to projected outcomes, e.g. more economic growth or job creation. This allows for transparency and accountability. There is a standard against which the success or failure of a particular policy measure can be judged.

In this vein, the administration has tied its tax cuts to promised job creation. Specifically, the administration projected that employment would grow by a total of 5.5 million jobs between July 2003 and the end of 2004, according to the Council of Economic Advisors. 1.4 million of these jobs were supposed to be the result of the administration’s latest tax cut proposal.

It is important to recognize that this projection starts its forward looking promise from July 2003, when the economy had already lost 2.5 million jobs since the recession started. That is, comparing the actual performance of the labor market to the administration’s promise implicitly ignores the loss of these 2.5 million jobs.

However, even while ignoring the shortfall, the economy still falls far short in terms of job creation. By March 2004, the economy was missing more than 2 million jobs that the administration had originally projected would be created by now.

The economy is millions of jobs short by any standard. Recovering these shortfalls will take time and substantially stronger and sustained job growth than the U.S. economy has seen over the past few months. The figures show that the administration’s policies have, by its own standard, failed. Ending the job loss recovery requires new ideas on policies, rather than tired old tax cuts.

  • Actual, Projected, and Benchmark Employment Growth, March 2001 to December 2005
    Actual employment has risen in recent months, with its strongest increase in March 2004. Even at the rate of March it would take months to recover the jobs that were lost since the beginning of the recession and years to meet other reasonable standards. The easiest to meet would be to expect that employment growth resembles the pace of the first 28 months of the last recession in the early 1990s. In this case, it would be August 2005, before employment reached its target. Harder to reach benchmarks are that employment growth should keep pace with population growth and that the share of the employed population grows steadily. In either case, employment would meet its target only well after 2006.
    Source: Bureau of Labor Statistics, Employment Situation, Washington, D.c=: BLS, and author’s calculations.

Dr. Christian E. Weller is a senior economist at the Center for American Progress.