Full Employment By Mid-Decade?

To get the unemployment rate by mid-decade back to 5 percent, where it was at the start of the recession in December 2007, job growth between now and 2015 will have to be strong enough to absorb the expansion in the labor force from growth in the working-age population, the increase in officially measured unemployment since December 2007, and the increase in "hidden unemployment" as represented by the precipitous drop in the labor force participation rate during the recession.

Since the recession started, officially measured unemployment has risen by 7.6 million, and hidden unemployment, by my estimate, has increased by 3.3 million, for a total rise of 10.9 million. This implies a current unemployment rate of 11.9 percent. Population growth is projected to add about 1.5 million jobseekers annually to the labor force in the years just ahead.

Some factors influencing the unemployment data can't be measured. There is an upward bias in the official unemployment count insofar as some survey respondents falsely claim they are unemployed and actively job hunting, not wanting to reveal they are working for pay in the underground economy - the "hidden employed."

Another unknown is whether some of the decline in the labor force participation rate in the past two years may have been non-cyclical - a secular voluntary change in the preference for unpaid activity over paid employment. In that case, during the current economic recovery fewer people outside the labor force will become active jobseekers and, ceteris paribus, full employment will be that much easier to attain.

If model-based estimates of hidden unemployment may be upward biased, the government's count of discouraged worker unemployment looks to be severely understated. The U.S. Bureau of Labor Statistics (BLS) measure of the discouraged jobless outside the labor force rose by less than 600,000 during the recession. Considering the sharp drop in labor force participation, equivalent to millions of jobless moving to the sidelines, the increase in the government's discouraged count looks suspiciously small. The BLS data on discouragement are a relatively young series and could benefit from a re-evaluation.

All things considered, by my estimate, there would have to be a net increase in total civilian employment of about 18 million between 2009 and 2015 to reach an unemployment rate of 5 percent by the end of the period. This implies employment growth averaging slightly more than 2 percent a year. That's not small, but it's also not unprecedented. Increases in either civilian or payroll employment averaged more than 2 percent annually in most of the 1960s as well as the mid-1970s, mid-1980s, and mid-1990s. The economic growth rates in these periods averaged about 4.5 percent, a rate not infeasible for the recovery stage of the U.S. economy in the years ahead.

However, this scenario comes with a caveat. While full employment by mid-decade is not an impossible dream, neither is it inevitable. Congress and the Obama administration can prevent it from happening by piling up burdens on private economic activity. For full employment to become a reality, the federal government has to avoid new programs that impede economic growth and job creation by overspending, over taxing, and over regulating.

Entrepreneurs, investors, and consumers today are uncertain and fearful about what's coming next. The threat as well as the reality of higher taxes on labor and capital will only delay the return to full employment, perhaps to the point where there's no longer any hope of getting there in the foreseeable future.