The US employment report for February contains further evidence that, on the surface at least, the American labour market is returning to normal. The unemployment rate of 8.3 per cent is 1.7 percentage points below its peak in October 2009. Yet consumer pessimism about job prospects remains almost as bleak as it was in the darkest hour of the recession. If the labour market is really improving as much as the official data imply, no one seems to have told middle America.
Employment gains have certainly been strong in recent months. But over a longer period it seems that the labour force has been growing much less strongly than normal. The participation rate has actually fallen from 65 per cent at the height of the recession to 63.9 per cent now.
This shrinkage, part voluntary and part involuntary, leaves the potential output of the economy lower than it was before, and may explain why Americans do not perceive this recovery in the labour market as a genuine one. It is a major relief that the labour market is now clearly improving. But the financial crash of 2008 continues to cast a very long shadow on America’s economic potential. Continue reading »