Economists have come up with a number of possible explanations for why the unemployment rate rose so much last year. The first explanation for the failure of Okun’s law is that special factors not directly related to output growth may be pushing up the unemployment rate..  A ...possibility is that extended unemployment benefits are artificially boosting reported unemployment rates because workers who collect unemployment checks may be saying they are looking for work even if they have given up...

A second possible explanation is that last year’s enormous decline in employment was somehow an aberration...

There is an alternative explanation regarding the events of last year though that bodes poorly for rapid employment gains going forward. According to this view, last year’s large increase in productivity is here to stay. In that case, we won’t see a quick drop in unemployment and may be in for a jobless recovery akin to those in the early 1990s and early 2000s. This is closer to my view and broadly consistent with my forecast.  According to this perspective, the recession has forced businesses to reexamine just about everything they do with an eye toward restraining costs and boosting efficiency. Strapped by tight credit and plummeting sales, businesses have overhauled the way they manage supply chains, inventory, production practices, and staffing...

 

Economists have come up with a number of possible explanations for why the unemployment rate rose so much last year. The first explanation for the failure of Okun’s law is that special factors not directly related to output growth may be pushing up the unemployment rate..  A ...possibility is that extended unemployment benefits are artificially boosting reported unemployment rates because workers who collect unemployment checks may be saying they are looking for work even if they have given up...

A second possible explanation is that last year’s enormous decline in employment was somehow an aberration...

There is an alternative explanation regarding the events of last year though that bodes poorly for rapid employment gains going forward. According to this view, last year’s large increase in productivity is here to stay. In that case, we won’t see a quick drop in unemployment and may be in for a jobless recovery akin to those in the early 1990s and early 2000s. This is closer to my view and broadly consistent with my forecast.  According to this perspective, the recession has forced businesses to reexamine just about everything they do with an eye toward restraining costs and boosting efficiency. Strapped by tight credit and plummeting sales, businesses have overhauled the way they manage supply chains, inventory, production practices, and staffing...

 

I think we will see job growth going forward because at some point firms will be caught short of employees... Usually when [the unemployment rate] starts ticking down it continues on a downward track

[M]y conclusions... are that the employment response in the last two recoveries was much slower than it was in the two earlier recoveries in the 1970s and 1980s.  And unfortunately the financial headwinds, lingering labor market problems, and a cautious attitude of consumers and businesses in the wake of the financial crisis make it likely that recovery in employment terms will also be slow this time. 

Unfortunately, I expect a rather slow recovery in output, and a rather slow recovery in employment given the level of output growth

Even if the economy grows as I expect, things won’t feel very good for some time to come. In particular, the unemployment rate will remain elevated for a few more years, meaning hardship for millions of workers. Moreover, the slack in the economy, demonstrated by high unemployment and low utilization of industrial capacity, threatens to push inflation lower at a time when it is already below the level that, in the view of most members of the Federal Open Market Committee (FOMC) best promotes the Fed’s dual mandate for full employment and price stability.

[F]or the immediate future, the risk to price stability is a deflationary risk, not an inflationary one.
...
[W]e are likely to see a prolonged period of sluggish economic performance and uncomfortably high unemployment as businesses reallocate capital and labor to fit the new economic landscape.

It is…likely to take a considerable period for the labor market to recover, as employment may well continue to decrease in finance, autos, and construction, for example, even as it picks up elsewhere. It is worth recalling in this regard that the unemployment rate peaked 15 months into the expansion of the 1990s and 19 months into this decade's expansion. In any event, with the passage of time—as we move into the middle of next year and beyond—I would expect to see a resumption of healthy growth.

[F]irms are still reluctant to hire, and the unemployment rate reached 9-1/2 percent in June and will likely further increase through the remainder of the year before it flattens out in 2010.

I expect that we will turn the growth corner sometime later this year, but I am not optimistic that the economy will spring back to normal anytime soon. What’s more, I expect the unemployment rate to remain painfully high for several more years.

[U]nemployment rates, in my judgment, are likely to remain higher and linger longer than in recent recessions. The "jobless recovery" may prove to be a familiar and vexing refrain.

Looking ahead, I could well imagine that the natural rate of unemployment trends higher.

After two quarters where real GDP shrank by more than 6 percent, I expect that the economy will contract by much less than that this quarter, and that we will begin to see positive growth – perhaps by the end of the year.
...
With significant growth in payroll employment unlikely until next year it will obviously and unfortunately be some time before we see labor markets return to what we think of as “full employment.”  And it is too soon to know when the trough of the recession will occur, although there are hopeful signs that we are nearing it.

Thus, while forecasting in the current environment is tricky, many forecasters, myself included, expect the second quarter of this year to exhibit a less severe decline in real GDP. Yet, I remain relatively optimistic and expect positive but modest growth in the second half, making fourth-quarter to fourth-quarter real GDP growth only slightly negative for 2009.

I am also relatively optimistic about growth next year. In fact, since January, I have not changed my growth forecast for 2010 or 2011. I expect the recovery to gain traction in 2010, with growth picking up to about 3 percent and then settling down to its long-run steady state of about 2.7 percent in 2011.

The sharp rise in the unemployment rate in the first few months of 2009 and the steep declines in payroll employment have led me to revise upward my unemployment rate forecasts. I expect the unemployment rate to peak sometime early next year above 9 percent, before falling gradually.

Under these conditions, I envision a slow recovery. Not a V-shaped snapback—nor even a U-shaped one—but a very slow slog as we find a more sensible and sustainable mix between consumption and savings and investment.

You know the numbers that have been reported for the nation for the first quarter: Even after upcoming revisions, I venture we’ll find we contracted at somewhere between 5 and 6 percent at an annual rate. The pace of decline will moderate in the current quarter, and then we’re likely to bounce along the bottom for a while, perhaps punching through to positive growth as 2010 dawns. I would be delighted, but surprised, if meaningful sustained growth gets under way any earlier. Regardless, increases in unemployment, while mitigated by the expansion of government (particularly the need for census takers) will likely take us to a 10 percent jobless rate before we reverse course. And global excess capacity is likely to remain excessive for some time to come.

We're going to have fewer investment bankers and fewer construction workers, probably, in the future, because those sectors got very large, and those people will find work in new areas. So there's going to be some reallocation of labor among different sectors, which is going to affect the rate of reemployment as well.

In the Q&A session

I expect the unemployment rate to continue rising to a level that could surpass 10 percent by year-end.