Economics, Pethokoukis

Study: Depressed U.S. job market costs economy $1.2 trillion a year

I frequently describe the catastrophic state of the U.S. labor market as the Long Emergency. Every day, week, month, and year that millions of Americans are unemployed or underemployed creates further long-lasting damage to workers and to the economy overall.

You could also describe the underemployed state of the U.S. economy as the Lost Opportunity. The following chart, says JPMorgan economist James Glassman, “illustrates the ‘lost opportunity’ represented by the absence of employment that has come about from this recession. It translates the decline in the percentage of the population that is not working into GDP—and, therefore, income that is foregone, saving that does not occur, wealth creation that is deferred, and investment in the nation’s capital stock that does not take place—that is foregone.”

According to Glassman, the shrinkage of employment in this recession implies that the macroeconomic opportunity cost is about $1.2 trillion annually:

Lost opportunities associated with an underemployed economy threaten the economy’s future potential growth rate, because it is virtually impossible to recoup today’s lost work, given the constraints on the country’s productive capacity. In other words, the faster the cyclical damage is repaired, the less negative the implication for the future.


5 thoughts on “Study: Depressed U.S. job market costs economy $1.2 trillion a year

    • As memory serves me, had we grown at a nominal (including inflation) GDP rate of 4.5% annually over the past 4-years, then nominal GDP would be 11% higher than it is today. And if we grow at a nominal GDP rate of 6.5% annually, then it will take us 6 more years just to close the gap.

      To date, M2 has been growing on at about 6+%, slightly above its historical long-term rate. The excess reserves held at the Fed, on the sidelines and not now being put to work in the economy, could find their way into M2 if there was a serious expansion in loan demand. Those excess reserves would thereby be put to work in the economy (via M2) and the velocity of money should increase. That means more inflation.

      And this leads me to conclude, and I could be wrong, that the Fed will be willing to temporarily tolerate higher rates of inflation in the years immediately ahead. Asset prices (homes and stocks) will be buoyed, confidence will build, corporations will enjoy some pricing power, and margins and profits will surprise on the upside.

      That’s how I’m betting the next few years. Its a little more optimistic than most folks see it.

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