persistently high unemployment rate is of concern to Congress for a variety of
reasons, including its negative consequences for the economic well-being
of individuals and its impact on the federal budget. The unemployment rate
was 9.5% when the economy emerged from the 11th postwar
recession in June 2009. It climbed further to peak at 10.0% in October 2009.
The rate has slowly declined since then. Although it dropped below 8% in
the fourth quarter of 2012, the unemployment rate remains high by
After most postwar recessions, it took at least eight months for the
unemployment rate to fall by one full percentage point. The slowest
decline occurred following the 2001 recession’s end, when the unemployment
rate was a comparatively low 5.5%. About 3½ years elapsed before the rate fell
just one-half of one percentage point. In contrast, the recovery from the
severe 1981-1982 recession began with the highest unemployment rate of the
postwar period (10.8%). In that instance, it took only eight months for
the rate to fall over one percentage point. Some hoped the unemployment
rate would fall as quickly after the 2007-2009 recession, but the speed of improvement
has been more typical of the so-called jobless recoveries from the 2001 and
1990- 1991 recessions.
What appears to matter for a reduction in the unemployment rate is the size of
the output gap, that is, the rate of actual output (economic) growth
compared with the rate of potential output growth. Potential output is a
measure of the economy’s capacity to produce goods and services when resources
(e.g., labor) are fully utilized. The growth rate of potential output is a
function of the growth rates of potential productivity and the labor
supply when the economy is at full employment. If potential output growth
is about 2.5% annually at full employment, then the growth rate in real
gross domestic product (GDP) would have to be greater to yield a falling unemployment
rate. How much greater will determine the speed of improvement in the unemployment
rate, according to a rule of thumb known as Okun’s law.
In its August 2012 economic forecast, the Congressional Budget Office (CBO)
estimates that the annual average growth rate of real GDP will gradually
approach the growth rate of potential output over the 2012-2022 projection
period. As a result of this slow narrowing of the output gap, the
unemployment rate is forecast to 5.9% by 2017.
Date of Report: January 7, 2013
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