Unemployment Likely to Remain High…but How High?

August 18th, 2011 at 5:56 pm

Moodys.com is out with their latest forecast, and here’s a look at where they think unemployment is headed (thanks to economist Mark Zandi for sharing these data).  First, they’ve got unemployment going up a bit before it comes down…and even then, it’s still elevated by years’ end…well into the 8s.

This comes right out of the type of analysis shown here on the economic consequences of below-trend growth.  Moody’s GDP growth forecast for this year is 1.7%–and unless GDP is beating the trend of around 2.5%, the unemployment rate will tend to rise.

But let’s look at some policy issues invoked by their unemployment forecast, particularly the impact of the payroll tax holiday (PTH) and extended unemployment insurance (UI).  The President has, of course, been calling for Congress to extend these for another year given that they expire at the end of this year.

As I wrote yesterday:

These are both essential—EPI estimates that to lose them next year would cost over one million jobs.  But since they’re already in the system, they don’t add anything new, so it’s like keeping your foot where it is now on the accelerator.  If they expire on schedule at years’ end, your foot comes off.  But keeping them going only maintains current speed, such that it is.

Like most forecasts right now, Moody’s assumes that the payroll tax holiday—a 2% wage boost for most workers worth over $100 billion/yr—will be continued next year.  That’s built into their forecast.

Using Moody’s estimates of the impact of these policies on growth and some of my own calculations about the growth of the labor force, one can back out the path of unemployment under two different scenarios:

–if we fail to extend the PTH (bad!)

–if we are able to extend both the PTH and UI (good!)

Source: Moodys.com, my calculations

If Congress lets the PTH expire, unemployment goes up more and ends up only slightly below 9% at the end of next year.  If we extend the PTH and UI, the jobless rate falls a bit further, though it would still be up there at 8.3%.

At any rate, as Ezra Klein stressed today on an MSNBC segment we did today (with Zandi, no less), it’s way past time to stop inflicting wounds on ourselves.  Keeping these measures in the economy next year is the least we can do—that’s the starting point upon which to build other job growth ideas, like FAST!.

Update: A commenter asked the good question: how do the PTH and UI have an impact on unemployment?  The PTH is a 2% wage subsidy, so it puts more money in your paycheck which lots of folks then spend.  The extra spending creates more economic activity, including jobs, and that lower unemployment.  Similarly, people receiving unemployment insurance benefits tend to spend them with the same result: more growth/jobs than would otherwise occur.

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12 comments in reply to "Unemployment Likely to Remain High…but How High?"

  1. Riggsveda says:

    Moody’s extrapolations seem a bit high in any case. I don’t hear the looming local and state government layoffs being added into this mix. Now that states have passed their budgets, if they are getting ready to enforce union layoffs, they normally have to give 60-90 days notice to the unions prior to enacting those furloughs, depending on the contract. That means we are looking at news of layoffs coming within the next week or two and extending for another month or so. I’d want to see what unemployment is looking like in October and November before buying into any forecast.

  2. Carol says:

    How do the UI and PTH help unemployment?

  3. Nadia_H says:

    But, some research, suggests unemployment benefits can push the rate up. This study by the SF Fed. found that extended unemployment benefits pushed up the unemployment rate.

    Maybe the President could push Baker’s work sharing to offset the unemployment benefits. It improves employment at all levels of GDP, and is potentially comparable as fiscal stimulus. The fact that it’s a tax credit which an AEI scholar endorsed probably makes it more palatable to the GOP in Congress.

  4. Another Matt says:

    Is the link to the MSNBC segment correct?

  5. comma1 says:

    There is something wrong with your graph. It goes until 4thQ 2012 and yet, for some reason your Y axis doesn’t have full employment on it — 5%.

  6. Dan Furlano says:

    Again, just wondering if you have an opinion about MMT. They have been calling for tax holiday for years.


  7. Tyler says:

    Great analysis. In a perfect world, UI and the payroll tax cut would be timed to expire when unemployment falls under two percent, and not a month before it.

  8. DHFabian says:

    Something we still can’t find the courage to discuss: We are not, and never were, a full-employment economy. Today, those over the age of 50 are most likely to get hit with long-term unemployment. Because wages have been driven downward for some 30 years, many of these have no assets or savings to fall back on. So — what should we do about them, in our post-welfare country? Should we simply work people until it would be cheaper to replace them, and then dump them out on the streets? Is this the best that America can do? Is this all that’s left to being an American worker?

    We’ve remained stuck on the idea that the ONLY answer is to call for job creation, utterly ignoring any possibility of restoring a system of basic humanitarian aid (i.e., welfare). Calling for job creation is so popular that this has been the leading promise of every candidate for decades, and yet we now have fewer jobs. We can’t pout people into suspended animation until jobs start appearing, so what should we do about them?