The rise in the unemployment rate in the United States after the economic recession of 2007-2009 was severe and unprecedented. During this period, the unemployment rate rose from a low of 4.4% in 2007 to 10% in late 2009, which is higher than an average increase of 5.6% experienced in the 1979-1982 recession periods. Despite many policy responses (fiscal and monetary) that have seen the unemployment rate declined to a low of 7.6% in March 2013, employment conditions remain unstable hampering sustained economic recovery.
Most of the economic policies adopted have improved the employment conditions. However, the decline in the unemployment rate can also be attributed to discouraged workers dropping out of the workforce and thus stripped of their unemployed status. Individuals are considered unemployed if they are available for work, are jobless and actively seeking employment. The employment to population ratio (E/P) refers to the proportion of the U.S. population who are working; it is not affected by the participation rate of workers in the labor market. Some important definitions include:
Participation rate = work force/civilian population
The employment to population ratio (E/P) = Employed population/civilian population
Unemployment rate = Unemployed population/labor force
The E/P has remained low from the recession period through the three years of slow economic recovery. The graph above shows that the employment to population ratio for the 25 to 54 age group has declined. This is correlated to an increase in the unemployment rate, an overall reduction in demand for labor, and the decline in the participation rate. Labor market participation is an indicator of the level of interest in working of the workforce; thus, the low participation rate indicates a decline in interest in working due to poor job prospects and low wages. It may also suggest that people have decided to seek more skills by pursuing higher education in the hope that they will receive better wages later when they get employed.
The E/P ratio is also a strong indicator of market conditions. The low 2009-2012 E/P ratio indicates that the U.S. economic growth is low in that people are not able to find jobs resulting in an increase in the unemployment rate over the same period. The U.S. economy has been in recovery since mid-2009; but, the pace of recovery has been uneven and slow. The slow growth cannot lead to sustained growth in the labor market, hence the rise in the unemployment rate.