Recovery-Proof: North Carolina’s Jobless Rate Continues to Climb 45 Months after Start of Recession

Crossposted on Prosperity Watch.

Defined as two consecutive quarters of negative growth in gross state product (GSP), recessions generally follow a well-established pattern: gross domestic product begins to shrink, firms lay off workers, the unemployment rate spikes and then begins to return to normal, as companies consolidate their operations and begin to rehire workers. An economic recovery then ensues, coupled with employment growth in the labor market. This is the pattern followed by each of the last four recessions, with the notable exception of the most recent downturn, which began in 2007.

As the chart below indicates, while the state’s unemployment rate in previous economic downturns returned to near-pre- recession levels within 40 months (just over three years) of the recession’s starting point, North Carolina’s jobless rate for the most recent recession peaked at 12% two years after the onset of the downturn in December 2007 and has remained largely above 9% ever since, despite what experts considered the beginning of a national economic recovery and consistent GSP growth by the spring of 2010. Perhaps even more troubling, the jobless rate has actually begun climbing again, reaching 10.5% in September. The state has experienced a recovery in terms of economic growth, but at the same time, this growth has not translated into robust job creation and recovery in the labor market.

The state’s unemployment rate seems remarkably recovery-proof.

This trend is partly explained by the collapse of the housing bubble and resulting global financial crisis in 2008. Many economists believe that these so-called “balance sheet” recessions cause more severe and long-lasting periods of joblessness than “normal” recessions resulting from natural contractions in the business cycle. These post-financial crisis “balance sheet” recessions usually involve significant private debt, as individuals and financial institutions seek to pay down massive debts accrued during the bubble times. As a result, these individuals and firms have less money to spend on consumption and business investment, driving down demand for private sector goods and services and acting as a drag on economic growth.

The nature of the recession may explain our state’s anemic private sector job growth, but as several economists have noted, this recession has been accompanied by the increasing unemployment in the public sector, as well. In fact, private sector job growth has been largely offset by deep layoffs in state and local governments. Since September 2010, the private sector created between 26,000 and 28,000 jobs, employment growth that has been eroded by anywhere from 18,000 to 21,000 layoffs in the public sector, depending in the survey. Without these layoffs, the state’s unemployment rate would be significantly lower—only 10.1%. Unfortunately, increasing public sector unemployment during a period of weak private sector job growth is acting as a further drag on labor market recovery, as layoffs reduce consumer spending from private sector firms, which in turn depresses private sector sales, profits, and employment expansion opportunities.