The deep recession that began in December 2007, when the economy began to contract, and ended in June 2009, when the economy began to expand again, has had a lasting effect on the labor market. More than four and a half years after the end of the recession, employment has risen sluggishly—much more slowly than it grew, on average, during the four previous recoveries that lasted more than one year. At the same time, the unemployment rate has fallen only partway back to its prerecession level, and a significant part of that improvement is attributable to a decline in labor force participation that has occurred as an unusually large number of people have stopped looking for work.
To a large degree, the slow recovery of the labor market reflects the slow growth in the demand for goods and services, and hence gross domestic product (GDP). CBO estimates that GDP was 7½ percent smaller than potential (maximum sustainable) GDP at the end of the recession; by the end of 2013, less than one-half of that gap had been closed. With output growing so slowly, payrolls have increased slowly as well—and the slack in the labor market that can be seen in the elevated unemployment rate and part of the reduction in the rate of labor force participation mirrors the gap between actual and potential GDP.
To a smaller degree, the slow recovery of the labor market is the result of structural factors that stem from the recession and the slow recovery of output but that are not directly related to the economy’s current cyclical weakness. For example, an exceptionally large number of people have been unemployed for long periods, and the stigma attached to their long-term unemployment, along with a possible erosion of their job skills, has made it difficult for them to find new work.
In assessing the slow recovery of the labor market, CBO estimates the following:
CBO expects that, under current laws governing federal taxes and spending, output will grow more rapidly in the next few years than it has in the recent past but recovery in the labor market will continue for some time. The agency projects that by the second half of 2017, the gap between actual and potential GDP will return to its average historical relationship—bringing the effects of cyclical conditions on unemployment and labor force participation back to their average values in 2018. However, CBO projects, the aging of the population will further reduce labor force participation during the coming decade, and the longer-lasting effects of the recession and slow recovery on unemployment and the size of the labor force will continue, albeit with diminishing magnitude, throughout the decade. All told, CBO projects that the unemployment rate will fall to 5.8 percent by the end of 2017 and to 5.5 percent by 2024 (compared with 4.8 percent at the end of 2007) and that the labor force participation rate will decline to 60.8 percent by 2024 (compared with 66.0 percent at the end of 2007).
The pace and nature of the economic recovery have been difficult to predict, and the path of the economy and the labor market will no doubt hold surprises as well. CBO’s projections of the labor market are subject to several sources of uncertainty, and many developments could cause outcomes substantially different from those CBO has projected.