Friday's US jobs report shows that the labor market is on the road to at least partial recovery in the world's biggest economy. But we should learn from the policy mistakes of the Great Recession. If we're not smart about it, we could have years of consistent monthly jobs growth and still not get back to the level of employment we had in February. Getting back to full employment as soon as possible should be the driving focus as we think about fiscal stimulus. And for that to happen, the US is going to need more of it.
The best way to think about this is to isolate temporary from permanent job losses in the employment data. The number of unemployed Americans fell by 2.3 million in May -- that's great news. But the composition of that a fall in temporary unemployment of 2.7 million while permanent unemployment rose by 400,000. That brought the unemployment rate to 13.3%, down from 14.7% the month before.
Consider what would happen if the next five months look like the May jobs report -- arguably an extremely optimistic case with the progression of the coronavirus still unclear. The number of people on temporary layoff would fall by 13.5 million. But the number of people on permanent unemployment would increase by 2 million. The overall level of unemployment would still be 4 million higher than it was in February, implying an unemployment rate of about 6% -- about 2.5 percentage points higher than before the Covid-19 outbreak.
And then perhaps from there we'd get a 2010s-style labor-market recovery, with a consistent increase of 200,000 or 300,000 jobs a month for years. This would be enough to make a dent in the unemployment rate and probably enough to please stock-market investors who would see steady, predictable economic growth. Bond investors also would be happy with modest growth that didn't bring on inflation. But it would take years for workers to recover what they've lost. It also wouldn't create the economic conditions that encourage companies to invest in new capacity; they would merely bring existing capacity back online.
We've been down this road before and know how inadequate and unsatisfying it is. We should learn from the mistakes of our recent past and strive to do better in the new decade. The Federal Reserve has shown through its actions that monetary policy makers understand this, and it's unlikely that they will remove stimulus as quickly as they did in the past decade.
That means it's up to Congress and fiscal policy. Last time, of course, Congress scaled back fiscal stimulus once the economic trajectory had improved, but while unemployment was still unacceptably high. This time Congress should continue to use fiscal stimulus for much longer, at least until measures of labor market slack are somewhat in the neighborhood of where they were at the start of this year.
How that stimulus is structured is up to Congress. The key is to create an environment with enough demand so that companies believe it makes sense to invest in future capacity for demand that has not yet materialized. We want airlines thinking they're going to need more planes in the future, and growth companies such as Uber and Lyft to think it makes sense to hire, invest and sustain losses because that kind of mindset is better than one where they're cautious and focused on short-term profitability and stock buybacks.
The US can have a V-shaped recovery if our leaders keep pushing -- trends in everything from housing to hotels and air travel during the past two months show that there's more economic momentum already than people thought possible in April. But without more determination by policy makers -- and Congress in particular -- to avoid the mistakes of the past decade, once the initial bounce is over we're more likely than not to get a recovery that's too slow for any of us, and especially America's workers.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement