Slow to Hire: Economy shows signs of improving, but recovery of job market will take a while

There is a growing sense among economists that the worst of the recession might be over. Unfortunately, the same can't be said for the labor market.

Most forecasts say that Americans are in for a long, painful slog as they try to get back to work. Some forecasts don't have the unemployment rate getting back to "normal" levels of around 5 percent until 2014.

It always takes a while for jobs to start appearing after a recession, but the wait could be particularly long this time around because of the unique nature of this downturn and the severe damage it has done to the labor market.

Here are questions and answers about why the darkest days might still be ahead for workers.

Q. If the economy starts improving, why won't the unemployment rate start dropping right away?

A. Unemployment has always been a "lagging indicator," meaning its improvement tends to lag behind broader economic growth.

That's partly because hiring is expensive, and companies want to wait and make sure they are on solid footing before they start bringing in new employees.

An example: On the heels of a downturn, a factory manager wants to make sure that an increase in orders isn't just a short-lived fluke before he hires more workers to ramp up production.

Q. How long does job growth typically lag behind the end of a recession?

A. The lag time has been growing. After almost every recession since 1960, unemployment started to drop only one or two months after the recovery started. But that changed after the recession ending in 1991, after which there was a 15-month lag. After the recession of 2001, the lag was 19 months. This time around, most economists aren't expecting the lag time to be that long, but it will be years before the unemployment rate hits pre-recession levels.

Q. Why is the lag time for job creation getting longer?

A. One big reason is the changing nature of U.S. recessions.

Downturns used to be cyclical, meaning demand dropped for whatever reason, and companies responded by cutting production and laying off workers. When demand picked up, companies simply rehired employees and got back to business.

That's not the case anymore. A 2003 study by the Federal Reserve Bank of New York found that downturns are increasingly "structural," meaning the economy itself changes and jobs disappear for good.

Many U.S. manufacturing jobs lost in 1991, for example, never came back, but instead were shipped overseas. Internet businesses disappeared altogether during the recession of 2001. After this recession, millions of jobs will likely disappear in the construction, finance and car-manufacturing sectors.

This increases the period needed for new jobs to be created, and for workers to get trained to fill them.

Q. So when will jobs start being created?

A. Sophia Koropeckyj, a managing director for Moody's Economy.com, said that hiring should start in the second half of 2010. But there is a lot of damage to undo before the unemployment rate starts to fall.

About 6.7 million jobs were lost during this downturn, the steepest labor-market decline since at least World War II. It has left 14.5 million workers unemployed as of July. Moody's doesn't expect the unemployment rate to sink toward 5 percent until 2014.

Q. What will it take to put a real dent in the unemployment rate?

A. The economy needs to produce a net gain of roughly 127,000 jobs a month just to absorb new job seekers created by population growth and immigration. To create more jobs than that requires some strong economic activity. But most analysts expect growth to be weak over the next four years.

Q. Why will growth be so weak when the economy recovers this fall, as many analysts expect?

A. One key reason is that this recession had its roots in the financial sector. Growth will be hobbled because of the deep damage suffered by banks during the financial meltdown last fall, which will make them less likely to lend money and fuel the economic recovery, said Chris Varvares, the president of the National Association for Business Economics.

That means credit, which is the lifeblood of economic growth, will be slow to come even after orders start to pick up and businesses want to expand.

Q. Is there anything that could hasten job creation?

A. Koropeckyj said that options are limited because it will take the private sector years to recover. Government spending on direct hiring, such as hiring teachers for educational programs or construction workers for infrastructure development, could create jobs in the near term.