CBO: Employment, Economic Output Not Expected to Recover Until 2016

By Matt Cover | March 25, 2011 | 5:00 AM EDT

In this Dec. 15, 2010 photo, Jesse Paloger holds up a sign while standing on Wall Street as he hopes to find a job, in New York. (AP Photo/Mark Lennihan)

(CNSNews.com) – The Congressional Budget Office (CBO) estimates that the labor force – and thus economic output – will not return to normal levels until at least 2016, meaning that the unemployment rate will stay above normal for many more years.

The finding comes from the CBO’s forecasts of the long-term changes in the labor force, published on Mar. 23, which estimate the size of the labor force based on demographic and population changes and the effects of current policies.

Based on those factors, and the current recession, the CBO predicts that the labor force will not return to its normal size until 2016. The CBO explained that because of the weakened state of the economy, the labor force would grow faster than normal as the economy recovered.

However, the CBO also noted that the labor force (and thus economic output) would not return to its full potential until 2016.

“Because of the weakened state of the economy, the labor force is currently well below its potential size,” the CBO explained in its background paper, Labor Force Projections Through 2021.

“[C]onsequently, CBO expects it to grow faster than its long-term trend between now and 2016,” said the report. “By that time, CBO projects, the output gap will have closed (that is, the economy will be operating at its full potential), and the actual labor force will be about equal to the potential labor force.”

This means that the economy will continue to underperform, relative to its potential,  until 2016, producing less and creating fewer new jobs than it would do otherwise

It also means that as the economy recovers over the next several years, it will add jobs at a higher-than-average rate, swelling the labor force faster than normal. However, despite this faster-than-normal rate of job growth, the labor force will not return to its full potential for another five years.

Over the long term, the CBO forecast that the size of the labor force relative to the overall population – known as the labor participation rate – will decline, due almost entirely to the retirement of the baby boom generation, virtually zeroing out the results of the higher post-recession growth rate.

In this Sept. 29, 2010 photograph, Brian Holbrook reads the Employment Guide while attending a Global Recruiting Solutions job fair in Livonia, Mich. (AP Photo/Paul Sancya, file)

“The second factor is the impending retirement of the baby boom generation (people who were born between 1946 and 1964), which will cause the potential labor force participation rate to decline throughout the next decade.

“In CBO’s estimates, the effect of the second factor outweighs the first [economic recovery], pushing down the labor force participation rate, on balance, over the next decade,” reads the report.

This does not mean that the overall size of the labor force will decline – that there will be fewer jobs – but that a smaller portion of the population will be working.

Essentially, because retirees are expected to live longer and the immigrant population is expected to continue to swell, the overall population will get larger relative to the amount of jobs available, decreasing the labor participation rate.