July 9th, 2020


Give thanks, Americans: Pessimists thought that prime-age employment would never recover from the Great Recession. This year, it did

Michael R. Strain

By Michael R. Strain Bloomberg View

Published Nov. 28, 2019

If you find your Thanksgiving table descending into a fight about whether President Donald Trump's Ukraine scandal rises to an impeachable offense, put down the mashed potatoes, tap your wine glass, gather your family's attention, and tell them that this holiday is reserved for gratitude. If they doubt that American public life offers anything to be thankful for, ask them to consider this: The American people are finally back to work.

This year, the rate of employment for people ages 25 to 54 - those who are mostly too old to be in school and too young to be retired - has finally recovered from the Great Recession.

At the peak in employment in April 2000, nearly 82 people out of every 100 in this age range had jobs. In January 2008, one month after the recession began, 80% of prime-age adults were employed. The rate cratered as employers shed workers, bottoming out at 74.8% in December 2009, six months after the recession officially ended. Prime-age employment showed no signs of recovery for several years thereafter, and only began a sustained upward climb in 2014.

Three months ago, in August, the rate finally hit 80% again. In September, it climbed to 80.1%, officially exceeding the post-crisis peak for the first time, over a decade after the downturn began. Last month, the climb continued, to 80.3%.

In the years since the recession ended, the stagnating prime-age employment rate provoked gloomy predictions that there would never be a full recovery. Many commentators and economists argued that structural factors were holding back employment - that people who were out of work simply didn't have the skills that businesses needed. These were reasonable concerns in theory, but the evidence for them was always scant.

This period also witnessed theories that were less reasonable, including some by professional economists - for example, that young men weren't working because video games had become so much more entertaining. (Are we to conclude that the recovery of prime-age employment was driven by a reduction in the quality of video games?)

The argument that employment wouldn't fully recover also related to cyclical factors. The concern was that falling unemployment and a tightening labor market would spark consumer price inflation before the rate of employment would reach its January 2008 level.

Here, the skeptics were on stronger ground. It was reasonable (though incorrect) to conclude - based on historical experience, among other things - that the labor market was nearing full employment when the unemployment rate fell below 6% in 2014. It was even more reasonable (though still ultimately incorrect) to argue this in the spring of 2017, when the unemployment rate fell below 4.5%.

The unemployment rate is now 3.6%, lower than it has been in five decades. By letting the labor market aggressively tighten, the Federal Reserve has allowed the prime-age employment rate to recover fully. (Though it hasn't fully recovered for male workers. The rate for men still has about 1 percentage point to go to reach its pre-crisis level.)

The lesson here for the Fed is to continue allowing the hot economy - the best jobs program there is - to increase employment. The Fed should always be concerned about inflation, of course. But if anything, inflation has slightly decelerated over the last year or two, and expectations about future inflation - a key driver of actual inflation - are flat. The experiment in very-low unemployment should be allowed to continue until the Fed can see the whites of inflation's eyes. Another reason to be thankful: the Fed seems to be planning on exactly this. Rate increases in 2020 are (currently) unlikely.

And here's yet another reason to be grateful this Thanksgiving: the economy in 2020 is set to have a better year. In 2019, the housing market had to absorb the effects of two years of rising interest rates and businesses had to deal with tariffs and uncertainty from Trump's ill-conceived and badly executed trade war, global economic weakness, and the fading fiscal boost from the 2017 deficit-financed Republican tax cut.

Events in 2020 will not reverse all of this, of course. The withdrawal of fiscal stimulus will be an economic headwind next year. And the president's trade policy has been so erratic it is hard to see how the administration could credibly signal to businesses that policy will be stable enough for them to make major investment decisions.

But the most likely scenario is that the U.S. and China are on track for a truce in their trade war, which could result in no further tariff increases and a pickup in U.S. agriculture exports to China. (The U.S. may even roll back the 15% tariffs on around $100 billion of Chinese goods imposed on Sept. 1, as well.) The housing market is already improving following this year's interest rate cuts, and consumers continue to spend.

If the economy indeed strengthens modestly next year, the employment rate is likely to keep climbing. It is plausible that the rate could close in on its year-2000 record high before the next recession.

This positive news should not obscure the need for pro-employment public policy. Measures should be taken to increase geographic mobility to help connect workers with jobs, help workers build the skills they need to command higher wages, strengthen earnings subsidies for low-income households to boost employment and fight poverty, and reduce barriers to employment in the labor market, like excessive occupational licensing requirements.

In the meantime, think about the benefits Americans already enjoy from the progress on employment that has already been made. An additional percentage point in the employment rate means 1.3 million more people with jobs, contributing to society through the market, supporting their families and enjoying the dignity and fulfillment that comes from work.

This Thanksgiving, be grateful for that progress.

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Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute.

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