Despite the resumption of economic (output) growth in June 2009, the unemployment rate remains at an historically high level more than three years into the recovery from the 11 th recession of the postwar period. Not until the fourth quarter of 2012 did the unemployment rate drop below 8%, its lowest level since January 2009. The persistently high unemployment rate is a cause of concern to Congress for a variety of reasons. Potential output is an unobservable measure of the capacity of the economy to produce goods and services when available resources, such as labor and capital, are fully utilized. The rate of growth of potential output is a function of the rate of growth in potential productivity and the labor supply when the economy is at full employment. When the unemployment rate is high, as it is now, then actual GDP falls short of potential GDP. As a result, the proportion of the labor force that is employed will fall. "More specifically, according to currently accepted versions of Okun's law, to achieve a 1 percentage point decline in the unemployment rate in the course of a year, real GDP must grow approximately 2 percentage points faster than the rate of growth of potential GDP over that period." After eight of the eleven postwar recessions, it took at least eight months for the unemployment rate to fall by one full percentage point. The slowest decline occurred after the recession that ended in November 2001 when the unemployment rate stood at 5.5%, the lowest unemployment rate recorded at the start of an expansion. About 3½ years elapsed before the unemployment rate fell one-half of a percentage point. In contrast, the expansion that followed the July 1981-November 1982 downturn began with the highest unemployment rate of the postwar period (10.8%). In that case, it took only eight months for the unemployment rate to fall more than one percentage point (to a still high 9.4%). The difference between the recoveries from the 1990-1991, 2001, and 2007-2009 recessions and recoveries from earlier recessions appears to be that large output gaps (i.e., slow economic growth relative to trend) persisted well into the three jobless (high-unemployment) recoveries. The Congressional Budget Office (CBO) regularly publishes projections of growth in potential output. CBO also projected in August 2012 that the annual average growth rate of real GDP will stay below the growth rate of potential output until 2018. The annual average rate of unemployment is therefore estimated to remain above 8.0% through 2014, and then fall to 5.9% by 2017 as the output gap progressively narrows.
A 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 historical standards.
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.