What Happened to Normal 5% Unemployment?

July 3, 2014 by Douglas A. McIntyre

79214824Unemployment may drop as low as 6% in the next few months, down from the current 6.3% level. However, a recovered U.S. economy has been marked by a 5% jobless rate, which is months, if not years, away.

The unemployment rate was at or below 5% in 72 months during the 1997 to 2001 period of economic prosperity. The string was 39 months during the recovery between late 2005 into early 2008. Then there was a sharp rise to the disastrous period in October, November and December of 2009, when the jobless rate was at or above 10%. Since then, 5% has been nothing more than a forecast of where unemployment should stand in 2017 and later.

The reasons for the very slow progress toward a 5% jobless level have been repeated several times, but are worth reviewing again. The most recent recession was unpredictably deep and long. Automation has robbed the total economy of some job opportunities. Businesses have learned they gain more flexibility when employing people part time. And the jobless rate remains high among the young, poorly educated and some ethnic groups.

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The counter argument against some of these claims is that unemployment is below 5% in 15 states and below 5.5% in four others. The success of job growth in these areas has been explained by the success of a handful of industries. However, the list includes several states that are very large based in population and economic diversity, such as Texas, Virginia and Ohio. Some would argue economic policy has a role in the improvements. Others claim that the residents of these states are lucky, or some extraordinary mix of the prospects of a number of industries has benefited these states more than others.

None of this entirely explains the fact that unemployment has remained stubbornly above 6% for so long and will stay there. The most recent economic forecast from the Federal Reserve is that the jobless rate will stay above 5% through 2016 and in “the longer run” beyond that. Even the central bank cannot make the case for what has been a complete, traditional recovery of the jobless rate.

Markets and economists will cheer when the jobless rates reaches 6%. However, the celebration will be premature.

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