Unemployment May Never Return to “Normal” 5%

There was a period, from early 1997 through mid-2001, when unemployment by month was under 5%. There was another such period from late 2005 to late 2007, when the number was below 5% as well. So, unemployment measured by that yardstick is not ancient history. Of course, by 2009, the jobless rate rose above 9% and remained there for two years.

If the gold standard by which national economic forecasts are measured is the work of the Congressional Budget Office (CBO), then the jobless rate will stay above 5% until 2024, according it its Budget and Economic Outlook 2014 to 2024. According to its model, yearly unemployment does not drop below 6% until 2017 and persists at 5.5% a decade from now. However, the CBO forecasts gross domestic product will rise more than 5% next year and the year after on a nominal basis, and it will be above 4% until 2024. So, the connection between expansion and joblessness has been lost, at least based on what “normal” is expected to be in the near-term future.

The reasons for the ongoing lack of enough jobs for Americans include the current long-term unemployment rate. If nearly 4 million of the 10.4 million people who are unemployed have been so for more than half a year, they become less and less likely to find work as time passes. That is, at least, the theory. Perhaps the skills of these people erode too quickly, perhaps they are too old. Or, perhaps the jobs offered them pay little more than the minimum wage, and some without jobs will not take them. Whatever the reason, there are too many of these long-term jobless to allow unemployment to return to 5%.

And the unemployment rate in some parts of the nation remains so high that for it to fall to even 7% is unlikely, at least for several years. In many of the cities in central California, unemployment remains about 10%. In the rust belt areas of Illinois, Michigan and Ohio, the situation is almost as bad. There is a case that, for some portions of the country, unemployment is permanently stuck at high levels. The businesses and industries that supported jobs in those regions are gone.

Five percent may never be normal again. As a matter of fact, the new normal may never even be close.