Monday, February 28, 2011

Why it will take years for the unemployment rate to go down?

The unemployment rate is hovering at 10% and it is more likely to stay this way for years to come. To understand the reasons for my assertion we need to look at history, look at the facts, and understand some economic concepts.

Historically, it took three to seven years on average for the unemployment rate to reach natural levels after a recession or a depression. A chart that supports such claim can be found here Two years has passed since the turmoil in the financial markets which validates that we still have up to four years to go.

The facts show that there are 13.9 million people that are unemployed according to data from the Labor Department. Meanwhile, the economy had added only 36,000 payroll jobs in January. Do the math and you will find that with such job growth we will need years for the number of unemployed to drop from the current level of 13.9 million to its natural level of 4 million. And considering the population growth as well just make the equation more complicated.

In economics, the unemployment rate is calculated by dividing the unemployed over the labor force. However, unemployed are defined as those who are seeking a job for at least 4 weeks. Those who gave up looking for jobs are not counted. And as soon as the job market improves those people will start looking for jobs again which means they will be counted as unemployed in the equation we have just described. In fact, this could lead the unemployment rate to not look that good. Because if the number of unemployed seeking jobs has increased more than the jobs added then we could see a temporarily increase in the unemployment rate.    

In conclusion, if you think that unemployment rate is going to go down after the modest growth we have observe in the economy so far, I would like to tell you to fasten your seatbelt. We still have way to go.

Hussain Jubail

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