Low Unemployment in 2023: Can It Last?

Low Unemployment in 2023: Can It Last?

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December 19, 2023
Low Unemployment in 2023: Can It Last?
The United States has experienced unusually low
patterns exist when the NAIRU was higher. Various cutoffs
unemployment in the past two years: The unemployment
for low unemployment could potentially have been used,
rate has been 4% or lower in every month since December
with similar results. Since World War II, there have been 12
2021. It hit its lowest level (3.4%) since 1954 in January
recessions, and the unemployment rate rose significantly
and April 2023. It then rose to 3.9% in October before
during all of them, peaking between 6.1% and 14.7%.
falling to 3.7% in November. Low unemployment has been
highly beneficial for millions of workers. But can it last?
There are few very low unemployment episodes that lasted
When unemployment has been low in the past, it has
as long as the current one already has before unemployment
remained low for varying time periods before giving way to
started rising and the economy entered a recession. There
a recession that caused unemployment to rise.
were five previous very low unemployment episodes (see
Figure 1), three of which featured a similar or shorter
Why Might Low Unemployment Be
period of very low unemployment than the current
Followed by a Recession?
expansion to date (expansions ending in 1948, 2001, and
The recent combination of very low unemployment and
2020). The other two cases, expansions ending in 1953 and
high inflation is consistent with the economic concept of a
1969, maintained very low unemployment for longer. Very
nonaccelerating inflation rate of unemployment (NAIRU)
low unemployment was sustained for just a few months
toward which the unemployment rate will naturally
longer than the current expansion before ending in 1953.
gravitate over the course of an expansion. Unemployment
Thus, only the 1960s expansion featured a substantially
below the NAIRU could be a sign that the economy is
longer period of very low unemployment—around four
overheating, further fueling inflation and therefore
years—than the current one before a recession began in
complicating the Federal Reserve’s efforts to restore low
1969. There were three low unemployment episodes, and all
inflation. An overheating economy is, by definition,
lasted less than three years before recessions beginning in
unsustainable, and the Fed is likely to respond to high
1957, 1973, and 2007 (not shown in Figure 1). (Note that
inflation by raising interest rates, as it has done recently. A
the five expansions with unemployment below 4%
sharp rise in interest rates could itself cause a recession.
maintained low unemployment for longer if a 5% threshold
Monetary tightening in such situations has historically
is used.) The unemployment rate never fell below 5% in the
resulted in recession more often than not. (For an in-depth
remaining four expansions before they ended.
discussion, see CRS In Focus IF12543, Has the Federal
Reserve Achieved a Soft Landing in 2023?)
Figure 1. Low Unemployment Expansions
Since World War II
One difficulty with the NAIRU is it does not seem stable
over time, although it is hard to tell because it is not directly
observable. Thus, at any given time, low unemployment
could be relatively close to or far from the NAIRU. (For an
explanation of NAIRU and its relationship to inflation, see
CRS Report R44663, Unemployment and Inflation:
Implications for Policymaking.)
Has Low Unemployment Resulted in
High Inflation and Recessions in the Past?
In the current expansion, unemployment first fell below 4%
in December 2021 and has remained at or below 4% every
month since. How unusual is this and how much longer can
it last? To answer that, this In Focus looks at whether past

periods of low unemployment were quickly followed by
Sources: CRS calculations based on Bureau of Labor Statistics data
recession. The following analysis looks at expansions since
and National Bureau of Economic Research business cycle dates.
the end of World War II featuring sustained periods of very
Notes: Series begins when unemployment rate first fal s to 4% and
low unemployment at or below 4%—comparable to the
ends with peak unemployment. Date indicates year recession begins.
current period—and how long they lasted before the
expansion ended and a recession began. Many economists
Did the eight low and very low unemployment episodes
estimate the NAIRU currently to be in the 4% range. But
result in high inflation? The four recessions starting in
because it seems to change over time, the In Focus also
1957, 1969, 1973, and 2007 were preceded by a
looks at expansions featuring sustained periods of low
combination of high inflation and low unemployment. The
unemployment at or below 5% to see whether similar
1960s episode could be considered the exception that
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Low Unemployment in 2023: Can It Last?
proves the rule that very low unemployment cannot be
unusual and suggests that low unemployment may not be
sustained for an extended period of time. It had the longest
solely a cyclical phenomenon. Some observers have
period of very low unemployment, but during that time,
hypothesized that unemployment has remained low despite
inflation steadily rose from 2% to 6%—consistent with an
the slowdown in economic growth because employers,
overheating economy with an unemployment rate below the
previously hamstrung by pandemic labor shortages, are now
NAIRU. But recessions in 1948 and 1953 followed periods
hoarding workers they do not need. Although labor
of falling inflation, and 2001 and 2020 featured relatively
shortages seem to have alleviated somewhat in recent
low and steady inflation. Following consistently low
months, the low unemployment-to-job-opening ratio
inflation in the decades before the pandemic, economists
suggests that the unemployment rate is still unsustainably
had de-emphasized the inflation-unemployment
low.
relationship. The recent experience has raised questions of
whether that relationship has reemerged.
On the other hand, the employment-population ratio is not
particularly high right now—it was higher during the
Sometimes expansions end because of an economic shock,
previous expansion and continually from 1986 to 2008.
not overheating. For example, the recession in 2020 was
This suggests that if more people could be drawn back into
caused by the onset of the pandemic, not the very low
the labor market, it could alleviate labor market tightness
unemployment preceding it. Some of the recessions that
without higher unemployment. (Only a person who is
were preceded by a period of low unemployment and high
seeking a job and does not have one is classified as
inflation may have had more proximate causes than the
unemployed; people who are not seeking jobs are classified
general overheating, such as supply shocks or distress in
as not in the labor force.) Given the low ratio of
financial markets. Nonetheless, overheating may have made
unemployed workers to job openings, an influx of workers
the economy more vulnerable to such occurrences.
to the labor force could potentially result in available job
openings being filled (i.e., higher employment) rather than
Do Other Indicators Suggest
increased unemployment. Since unemployment first fell
Unemployment Is Unsustainably Low?
below 4% in December 2021, the employment-population
The unemployment rate is just one measure of the state of
ratio has increased by one percentage point, and the
the labor market, and a look at other indicators can provide
economy has added roughly 7.3 million jobs.
more insight into whether unemployment is unsustainably
low. Anecdotal evidence and other labor market indicators
A similar metric to the employment-population ratio, the
point to significant labor market tightness that may be hard
labor force participation rate (LFPR), measures the size of
to sustain. For example, the ratio of unemployed workers to
the labor force relative to the population. It is unclear
job openings has been less than one since May 2021,
whether an increase in the size of the workforce large
indicating there is more than one job opening for every
enough to ease labor market tightness is feasible based on a
person seeking work (see Figure 2).
demographic breakdown of the LFPR. There is more room
for growth in some demographic groups than in others. Part
Figure 2. Unemployed Persons Per Job Opening
of the decline in LFPR is due to the aging population, and
January 2001 to October 2023
older workers who leave the labor market are least likely to
reenter. Prime-age female participation has already fully
rebounded since the pandemic. But younger workers and
prime-age men have seen a long-term decline in labor force
participation that could potentially be reversed. It is unclear
whether a strong labor market could induce higher
participation among groups that are dragging down overall
participation or whether policy changes would be needed.
Another indicator that sheds light on whether
unemployment is unsustainably low is the NAIRU itself.
Even though the NAIRU is not directly observable, it is
possible that it has trended downward in recent years,
making a lower unemployment rate more sustainable than
previously. One well-understood driver of the NAIRU is
Source: Bureau of Labor Statistics, Job Openings and Labor
the age profile of the population—young workers
Turnover Survey.
consistently have higher unemployment rates than older
In 2020, labor shortages initially developed because of the
workers—so an economy with relatively more old workers
extreme sectoral disruptions caused by the pandemic.
would be expected to have a lower NAIRU than one with
Industries that shed jobs at historic rates due to shutdowns
more young workers. Because of the aging of the
then had trouble restoring employment levels during
population and a decline in the participation rate of young
reopenings. These shortages were alleviated (but not
workers—trends that pre-date the pandemic—the share of
eliminated in all cases) when economic and health
the labor force under age 25 has recently been the lowest
conditions normalized. Meanwhile, unemployment became
since the data series began in 1948. Nonetheless, most
very low and stayed low despite lackluster economic
current estimates of the NAIRU are not below 4%.
growth throughout 2022 and the first half of 2023. The
combination of low growth and low unemployment is
Marc Labonte, Specialist in Macroeconomic Policy
Lida R. Weinstock, Analyst in Macroeconomic Policy
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Low Unemployment in 2023: Can It Last?

IF12554

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