By David Andolfatto and Marcela M. Williams

1. Introduction

The U.S. economy lost almost 8 million jobs in the latest recession, and the unemployment rate rose to over 9 percent. Roughly 1 million jobs have been added to the economy since early 2010, but the unemployment rate remains persistently high. Some policymakers are concerned about the prospect of a prolonged "jobless recovery," a period of rising average income (GDP) with little or no employment growth. There is considerable debate over what, if anything, monetary and fiscal policy can or should do to help the labor market adjust in the wake of one of the worst recessions since the Great Depression.

Disagreements over what should be done to stimulate the labor market stem, in part, from its complicated nature. The labor market has many moving parts, and policies frequently have unintended consequences. The purpose of this essay is to describe a few of these moving parts and to explain why it is sometimes difficult to interpret the ups and downs we experience in the labor market. One theme that emerges is that the big picture, as seen in the aggregated data, is not always representative of what is happening up close, as seen in the data that have been dissected.

We begin by looking at the timeline of U.S. employment since World War II. Employment, measured as a ratio of population size, remains relatively stable over time. This overall behavior, however, masks several underlying trends. For example, employment rates have generally been rising for women and falling for men. We look next at the share of employment across different sectors of the economy. Again, we see sharp differences in the evolution of employment over even relatively short periods of time. These different behaviors suggest, among other things, a degree of caution in the use of a "one size fits all" policy affecting the labor market.

We will then turn to the issue of unemployment. Contrary to common belief, unemployment is not technically a measure of joblessness. It is, instead, a measure of job search activity among the jobless. Millions of unemployed people find jobs every month, even in a deep recession. Millions of workers either lose or leave their jobs every month, too, even in a robust expansion. The large and simultaneous flow of workers into and out of employment suggests that the labor market plays an important role in reallocating human resources to their most productive uses through good times and bad.

The job search activity of unemployed workers is mirrored on the other side of the labor market with the recruiting efforts of firms that have unfilled job openings. It is a property of the labor market that job vacancies coexist with unemployed workers, a fact that suggests the presence of "frictions" in the process of matching workers to jobs.

Vacancy and unemployment rates tend to move in opposite directions over the business cycle. Normally, good times induce firms to create job openings, and those additional openings then make it easier for unemployed workers to find jobs. However, the usual relationship between unemployment and vacancies sometimes breaks down. Since the end of the latest recession, for example, job openings in the U.S. appear to have increased—yet unemployment remains persistently high. Some economists interpret this as evidence that the latest recession has led to "structural" change, which will take some time to work through.

Indeed, history shows that the unemployment rate frequently does take a long time to decline following a recession. Given the severity of the most recent recession and given recent experience, it is likely to take years before the unemployment rate falls back to its pre-recession levels.

David Andolfatto is an economist at the Federal Reserve Bank of St. Louis. His areas of expertise are money, banking and labor markets.

Marcela WilliamsMarcela M. Williams is an officer at the Federal Reserve Bank of St. Louis. She oversees the external communications function in Public Affairs.