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Pre-recession unemployment rate is out of reach

May 4, 2012: 11:50 AM ET

A new report authored by a Federal Reserve president says unemployment cannot fall to pre-recession levels without an inflationary impact. So get used to high unemployment.

FORTUNE – U.S. jobs growth may have picked up earlier this year, offering the millions of unemployed hope that better days are ahead. But once again, the government's monthly unemployment report comes with disappointing news.

In April, the nation's employers created 115,000 positions, after adding 154,000 in March, the Labor Department reported Friday. This was less than economists had expected, and investors are clearly disappointed. But perhaps it's about time we face the hard truths about the job situation in the U.S.: The unemployment rate probably won't ever fall to pre-recession levels. At least not anytime soon.

True, the unemployment rate edged down to 8.1% in April from 8.2% the previous month. That's not because more people found work, but rather because they dropped out of the labor force and aren't accounted for in the government's statistics. Jobs growth had picked up earlier this year, just as it did at the start of 2010 and 2011, only to tailspin amid economic shocks across the global economy. Last year the Japanese tsunami and other factors interrupted markets. Later this year, talk of higher oil prices and a euro zone recession could weigh on the U.S. economy.

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There's clearly a pattern here. But the beleaguered state of the jobs market may have less to do with external shocks. On Thursday, John Williams, president of the Federal Reserve Bank of San Francisco, suggested that perhaps Americans should lower their expectations given the challenges workers faces. A research note co-authored by Williams estimated that the lowest level of joblessness that can be reached without leading to inflation could be 6.5%. Before the recession, the unemployment rate was generally at around 5%.

A few factors, the authors say, are driving the so-called "natural rate" of unemployment up. First, it could be the extension of unemployment benefits. In early 2009, eligibility for unemployment benefits was extended from 26 weeks to up to 99 weeks.

While such benefits reduce hardships for the unemployed, they might also "reduce the incentive of the unemployed to seek and accept less desirable jobs," according to the report.

Also, there could be a bigger mismatch between job seekers and those hiring. In the years following the 2007-2008 financial crisis, the construction, finance and real estate industries suffered most. And the millions skilled in those areas may likely be struggling to catch up to other skills currently in bigger demand, such as education and healthcare. What's more, as U.S. Federal Reserve Chairman Ben Bernanke points out, the segment of workers who have been jobless for extended periods is historically high. And the longer they're unemployed, the harder it will probably be for them to find jobs as their skills deteriorate amid a weak market.

If workers are latching on to any hope that the economy has turned a corner, perhaps they'd be more realistic by hoping for a little less.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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