Why the Unemployment Rate Is So High

According to the last jobs report for 2012, the United States labor market continues to recover at a steady but modest pace despite a global slowdown, Hurricane Sandy and anxieties about future fiscal policy. Private payrolls increased by two million in 2012, and the unemployment rate fell by 0.7 percentage point to 7.8 percent. Over the last 34 months, the economy has added 5.8 million jobs.

But that leaves a four million shortfall in employment relative to its 2007 peak. And the jobs gap, the number of jobs necessary to return to this peak and cover the growth in the labor force since then, is stuck around 11 million. The labor market is still far from full recovery, with a tremendous waste of human talent and a personal toll on unemployed workers and their families.

This year is likely to be more of the same, as the deal on the fiscal cliff — the American Taxpayer Relief Act — will take about 0.4 to 0.6 percent off the economy’s growth rate.

Additional cuts in government spending later this year, above those already emanating from the cap on discretionary spending, would further restrain job creation. Proven policies to increase aggregate spending and near-term job growth, like the continuation of payroll tax relief and infrastructure investment, appear to be off the table. That’s a mistake, because weak demand and slow growth of gross domestic product are the primary factors behind the tepid pace of job creation. Read more....