Sent to you by wam4 via Google Reader:
I AM prepared to accept that the American economy faces some, and perhaps many, structural labour market problems. It would be strange if there were no structural issues slowing employment growth, and it would be stranger still if a sustained period of very high long-term unemployment didn't add to these problems. But if you're looking to explain the painfully slow recovery in labour markets, you don't need to focus on these structural problems. All you really need to look at is the path of GDP growth.
The recession was an ugly one, at least relative to postwar American recessions. Real output grew just 1.9% in 2007, was flat in 2008, and fell 2.6% in 2009. That performance was more than enough to create a large pool of unemployed workers. The American economy is estimated to have a trend growth rate between 2% and 3%. To reabsorb idled workers while also accommodating normal labour force growth, the economy needs to grow above that trend rate. In 2010 it barely managed this, growing at 2.9% for the year as a whole. In the first quarter of 2011, growth slowed to just 1.9%—below trend. We have yet to get official numbers on the second quarter, but it's a good bet that the expansion performed below trend once again. Goldman Sachs estimates the annual growth rate in the second quarter at just 1.5%. Macroeconomic Advisers puts it at 1.4%.
At best, closure of America's output gap seems to have stalled. And unsurprisingly, the labour market has failed to add enough jobs over the past couple of months to keep up with normal labour force growth. Meanwhile, early forecasts for third quarter output growth are being revised down. That seems premature to me; the third quarter has only just begun and it still seems likely that low petrol prices and a recovering Japan, among other things, may buoy American output. But the broader point is this: two years into recovery, GDP has simply not recovered fast enough to put unemployed Americans back to work, and it isn't clear that a sustained acceleration is on the way.
The question then becomes why growth has been so slow. I'll address that in a follow-up post.