WASHINGTON -- How long will it take to get to an unemployment rate of 6.5 percent? That's the target the Federal Reserve wants to reach before it begins raising interest rates. The best guess of top Fed officials is two and a half years from now or mid-2015, according to Fed Chairman Ben Bernanke at his news conference last week. It's a gloomy forecast; now come two economists who show that, under plausible assumptions, it could take a lot longer. How about 2018?
Michael Greenstone and Adam Looney of the Brookings Institution, a Washington think tank, did some rough calculations estimating the job growth needed to reduce the unemployment rate, 7.7 percent in November, to 6.5 percent. Their conclusion: If job creation's modest pace, about 220,000 a month during the past year, continues, the Fed's mid-2015 prediction will be fulfilled.
But of course, it may not continue. Greenstone and Looney also estimated what would happen under different rates of job growth, as the table below shows. The left-hand column gives average monthly job growth, the right-hand column the time when 6.5 percent unemployment is reached.
Monthly Job Growth Date Hitting 6.5 Percent
150,000 Spring 2018
200,000 Fall 2015
250,000 End of 2014
300,000 Spring 2014
In the recession, unemployment first reached 6.5 percent in October 2008. By the Fed's mid-2015 forecast, the economy will have exceeded that level for nearly seven years. If the threshold isn't crossed until 2018, recession-level joblessness will have lasted a decade. The arithmetic emphasizes the obvious: Job creation is America's first, second, third, and fourth most important problem.
Now, for statistics junkies, here are some technical details. The government conducts two monthly job surveys -- one of households, the other of businesses ("the payroll survey"). The 220,000 average of monthly job creation comes from the household survey. The payroll survey's average was only about 160,000. However, when adjusted for their differences, the surveys show nearly identical job creation in 2012.
Following Census Bureau projections, Greenstone and Looney assumed that the 16-and-over population would grow about 1 percent annually. The labor force participation rate -- the share of adults working or looking for work -- stays roughly stable. So there's a big caveat: If the participation rate rises because discouraged workers return to the labor market, the unemployment rate will stay higher for longer.
