Is That Going to Scar?

The Great Recession still echoes throughout America; some folks are not convinced the recession has ended.  Scars may have formed in a couple of segments within the economy, leaving long lasting impressions of the last contraction.  Real evidence is being examined by economists at the Federal Reserve Bank of San Francisco (FRSB) in order to make some sense of the slow pace of healing.  They noticed that the rate of improvement within the labor market was uneven and published a paper on the imbalance.  Additionally, housing professionals over at Zillow.com noted that the percent of homes underwater (houses worth less than the owner owes to a lender), while dropping, remains elevated relative to pre-crisis levels.  Marks on these segments of our economy could leave long lasting blemishes.

Based on the headlines alone, the employment market has made tremendous progress toward  being completely healed.  The unemployment rate is currently 5.5 percent according to the Bureau of Labor Statistics, and the Federal Reserve feels 5.2 percent unemployment is appropriate.  After reaching 10.0 percent in October 2009, there has been lots of healing.  However, there is a subset of workers who are involuntarily employed part-time, and the rate of improvement for this cohort has been much slower than headlines suggest.  As of May 2015, 4.2 percent of the labor force was working part-time even though they would prefer to have full-time jobs.  According to the economists in San Francisco, this is a little over 31 percent more than is normal when the headline unemployment rate is at its current level.

In their research, the economists in San Francisco found three structural (i.e. long-term) factors that determine whether or not a person is working part-time involuntarily: demographics, industry, and wage levels.   For example, employers in the retail or leisure/hospitality industries are tend to hire part-time workers, and this segment of our economy now represents a larger share of total employment than before the Great Recession.  Behavioral differences between generations are also causing the involuntary part-time percentage to rise.  Typically, workers under 25 years old are a primary source of willingly part-time employees, but their share of the labor force has been falling for decades, forcing firms to hire part-time workers within segments of the labor force that do not generally want to work less than full-time.  Finally, compensation continues to be a reason for firms to hire part-time workers (e.g. tax rules generally allow employers to exclude part-time workers from company benefit plans), and while this may not be a new development, the FRSB noted it as a cause for higher involuntary part-time work in their research.

Housing has developed a bit of a keloid as well.  According to the real estate website Zillow.com, the share of homes  underwater in America has been cut in half since the peak in the first quarter of 2012 (31.4 percent) but is still well above the pre-crisis norm.  As of the first quarter 2015, 15.4 percent of home owners remain underwater.  When the housing market is healthy, Zillow estimates the level should be somewhere around one or two percent.

Both labor and housing markets should heal eventually.  A nation with so many resources such as ours will survive and recover.  Developed economies tend to last for centuries.  However, those currently working, nearing retirement, or just entering the workforce are likely to feel the effects of the last contraction for the rest of their lives.  It may take a subsequent generation, those after the Millennials, before we find a cohort not scarred for life by the Great Recession.  (by C. Cox)