The San Francisco Federal Reserve Bank published a study this month with the headline, "Jobless Recovery Redux? Reasons for Pessimism." Here's a look at what they say, with a big assist from my favorite labor market analysts, Philippa Dunne and Doug Henwood. 

Reasons for Pessimism

The SF Fed looked at three labor market indicators — flows in and out of unemployment, involuntary part-time employment and temporary layoffs — to project how the unemployment rate might behave when the anticipated recovery begins.

They point out that before the 1991 recession, increases in the inflow rate, the speed at which workers move into unemployment, and decreases in the outflow rate, the pace at which they find jobs, were nearly equivalent in relative terms during recessions. Sharp increases in the unemployment rate were followed by rapid recoveries as firms hired back workers in improved conditions.

Increases in the unemployment rate in the 1991 and 2001 recessions, however, were driven by disproportionate declines in the outflow rate, making lack of hiring the primary culprit. And recoveries diverged from the established pattern as well: outflow rates recovered much more slowly than they had in pre-1990 recoveries. In fact, the authors cite several studies showing that current business-cycle fluctuations in the unemployment rate are driven primarily by the outflow rate.

The current recession is particularly nasty because the outflow rate is at an historic low and the inflow rate is rising in line with the recessions of the 1970s and 1980s. That's a worst-case scenario and has made the current condition too painful to many of our friends and neighbors.

What Does All of This Mean? 3 Possible Outcomes

The SF Fed goes on to evaluate several possibilities for the future.

• Their benchmark, which was no change in the outflow/inflow rates, would bring the United States to 10% unemployment by 2010.



• The optimistic consensus included in the paper proposes an employment recovery slightly weaker than that of 1983 and a bit stronger than that of 1992, bringing the unemployment rate to a peak of 10% in early 2010, followed by a decline.



• But if inflow/outflow rates behave as they did in 1992, unemployment would peak at 11% by summer of 2010, and remain above 9% through 2011.

According to the paper, that's where temporary layoffs and involuntary part-time work come in. In the current recession, those involuntarily working part-time have risen dramatically to an historical high, from 3.0% in December 2007 to 5.8% in April 2009, with significant reductions in hours across broad sectors. 

At the same time, the share of workers on temporary (vs. permanent) layoff is very low. In fact, it actually fell from 12.9% in December 2007 to 11.9% in April 2009. (Generally the share of workers on temporary layoffs rises during recessions.) So with few workers on temporary lay-off waiting in the wings, and a large number working part-time against their will, it seems logical that employers will expand the hours of partially idled workers instead of taking on new employees.

You see where this is going, right?