Goldman: Unemployment Will Remain Sky-High For A Very Long Time

Maybe stubbornly high U.S. unemployment is less perplexing than it appears. According to Jim O’Neill at Goldman Sachs, most major housing crises result in persistently high unemployment:

Goldman Sachs’ Jim O’Neill:

Most importantly, the rebound in growth tends to be more subdued than normal (Chart 6) and it can take many years before unemployment rates fall (Chart 7). In essence, the pressure from the private- sector adjustment and deleveraging tends to make it difficult to deliver the kind of strong growth that is needed to eat into spare capacity. Updating our work here and plotting the US experience so far—together with our latest forecasts—shows that the US recovery, although slower than most normal recoveries, is not particularly unusual relative to the experience of the more serious housing busts.

Chart

Even in terms of U.S. GDP growth, the path so far has been pretty standard for a housing crisis:

Chart

Investors tend to have a short memory, and it’s hard to keep blaming the housing crisis for problems that seem to persist well after wards. We try and find a new scapegoat since the old one seems tired, but maybe we’re forgetting that unemployment remains very high and GDP growth prospects are sluggish simply because that’s how recoveries from major housing crises tend to play out. It takes a very long time for unemployment to recover completely.

(Via Goldman Sachs, Global Economics Weekly, Jim O’Neill, 22 September 2010)

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