Economists have long held that 5 to 6 percent unemployment is the sweet spot between inflation and joblessness. However, today’s unemployment rate is the highest on record – with one exception – in the history of labor force and jobless statistics all the way back to 1948. Just how far gone is the jobless problem?
Unemployment figures by the Bureau of Labor Statistics (BLS) put the most recent unemployment rate at 8.2 percent (May 2012), down from the most recent peak point of 10.0 percent (October 2009).
To date, the highest unemployment rate (monthly) on record in BLS time series data is 10.8 percent (November, December 1982) – during the first years of the Reagan Administration.
Current unemployment trends indicate some abatement in joblessness based on private sector recovery following the financial meltdown of 2008. Weakness in the European economies, however, could jettison further near-term improvement in U.S. economic performance.
While partisan battling has focused largely on the fiscal side of job stimulus, monetary policy has gone unmentioned in most of the American political debate. It is restrictive monetary policy, however, which could derail back-to-work efforts the worst–and very possibly European rather than American monetary tightening will be the culprit.
That 10.8 percent high in unemployment, which plagued the Reagan team during its first-term, actually owed little to fiscal policy. It was restrictive Fed policy under Chairman Paul Volcker which stymied efforts to get workers back on the job at that time, particularly in the construction sector.
Prior to the 1982 record high, the highest unemployment rate previously on record was a persistent 7.8 percent level (July, August, November, December 1976) recorded during the lame duck Ford Administration.
During that time, a mix of inflation, oil price instability, inflated nominal interest rates, and “excess guns & butter” spending plagued the United States for the better part of a decade. During the 1970’s, even the “corporate conservative” Nixon Administration had resorted to wage and price controls to get a handle on then chaotic economic conditions.
Looking ahead to 2013-2016, what can we expect in the jobless picture? It’s reasonable to expect we can get unemployment to taper off into the 6 percent range, “other things equal.” Tracing data for 1948 to date, particularly the period spanning 1958-1994, variation in the jobless rate generally has run in the 5 to 7.5 percent range.
According to Gallup sources, “Despite what appears to be a slow and weakening U.S. economy, Gallup’s unadjusted unemployment rate for the 30 days ending June 30 is 8.0%—the same as in May—and Gallup’s seasonally adjusted unemployment rate for June is 7.8%, based on year-ago BLS seasonal adjustments. If the government’s unemployment rate declines—let alone falls below 8.0%—on Friday, it is likely to be touted as a sign the U.S. economy is getting stronger, not weaker.” (Source: behavioraleconomy.gallup.com)
Unemployment expectations vary widely in an election year. Sean Snaith, economics professor at the University of Central Florida advises that joblessness won’t drop back to 6 percent until after 2016. Research just released by the Federal Reserve Bank of San Francisco suggests that the new norm may now be more like 6.7%. A majority of economists in the latest Associated Press Economy Survey expect the jobless rate to stay above 6 percent for at least four more years. AP notes, “economists consider a “normal” level to be between 5 percent and 6 percent.”
No matter how many variables may affect the jobless rate, political pundits generally demonstrate it to be the one economic statistic that can make or break a Presidential race. Six percent appears about where the next President will need to aim in terms of how much joblessness makes sense structurally. Making that happen will depend on good public policy and execution, regardless of partisan gridlock.