After the recession ends, when will unemployment fall?

The unemployment rate typically continues to rise for a few months after recessions end, but in recent years the timing seems to have changed.  After the end of recessions from 1948 until the 1980s, rapid economic growth followed quickly with a sharp improvement in unemployment.  But after the last two recessions (recessions that ended in March 1991 and November 2001) there was a considerably longer period before the economy grew rapidly and unemployment fell.  This article will document this finding.

During recessions, the economy slows and the rate of unemployment rises. When a recession ends and the economy starts to grow, there is often a period of a few months (or more) until the unemployment rate falls.  I believe that the data indicate that the recession that started in December 2007 probably ended in July or August of 2009 (see here for the data), but the NBER, the agency that determines when recessions end, may not make an official decision until the evidence is much clearer, probably sometime in 2010 or 2011.

If the recession did end in the third quarter of 2009, when will the rate of unemployment fall?  As I write, in early January 2010, unemployment is around 10%, somewhat higher than it was when the recession ended.  There is a rough rule of thumb that the economy must grow around 3% to generate enough jobs to keep the rate of unemployment constant (see here for a more detailed analysis).  The economy grew at 2.2% in the third quarter of 2009, so it is not surprising that the unemployment rate continued to rise.

Here is a table that lists the end dates of the postWorld War II recessions, the lag from the end of the recession until the GDP grew above 4% and the change in the unemployment rate in the twelve months following the recession.  The 4% level was chosen as representing a rate of growth sufficient to substantially decrease the unemployment rate.

End of Recession Time to 4% Growth 12 month Change in Unemployment Rate
October 1949 1 Quarter -3.7%
May 1954 1 Quarter -1.6%
April 1958 1 Quarter -2.2%
February 1961 1 Quarter -1.4%
November 1970 1 Quarter +0.1%
March 1975 2 Quarters -1.0%
July 1980 1 Quarter -0.6%
November 1982 1 Quarter -2.3%
March 1991 4 Quarters +0.6%
November 2001 7 Quarters +0.4%
August 2009 (E) NA +0.3% (August to November)

Sources:  NBER, BEA and BLS (data obtained from FRED).

Following the recession that ended in October 1949 (during the fourth quarter), the economy grew at 17.2% in the first quarter of 1950, one quarter later.  Twelve months later, in October 1950, the unemployment rate was 4.2%, 3.7% lower than the 7.9% when the recession ended.

For the period from 1945 to the 1980s, the economy grew relatively rapidly (above 4%) shortly after the recession ended. In the year following all but one of these recessions, the rate of unemployment dropped, usually around 1 to 2%.

If the recession that ended in 2009 were a typical 1940s/1980s recession, then we would expect the rate of unemployment to decline from the 9.7% level in August 2009 to around 8% in August 2010.  But if the recession is of the 1990s/2000 variety, then it would not be surprising to see 9-10% employment in late 2010.

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