Severe Crisis, Slow Recovery

Figure 18-6 shows real GDP in the United States and the European Union, the world’s two largest economies, during the crisis and for four years afterward, with the peak pre-crisis quarter—the last quarter of 2007 for the United States, the first quarter of 2008 for the European Union—set equal to 100. What you can see is that both economies suffered severe downturns, shrinking more than 5%, followed by relatively slow recoveries. As of late 2012, Europe had not yet regained its pre-crisis level of output, and the United States was barely above its previous peak.

Crisis and Recovery in the United States and the European Union In the aftermath of the 2008 financial crisis, aggregate output in the European Union and in the United States fell dramatically. Real GDP, shown here as an index with each economy’s peak pre-crisis quarter set to 100, declined by more than 5%. By late 2011, real GDP in the United States had only barely recovered to pre-crisis levels, and aggregate output in the European Union had still not reached its pre-crisis peak.

Sources: Bureau of Economic Analysis; Eurostat.

The severe slump and the slow recovery were very bad news for workers, since a healthy job market depends on an economy growing fast enough to accommodate both a growing workforce and rising productivity. Figure 18-7 shows two indicators of unemployment in the United States—the overall unemployment rate and the percentage of the unemployed who had been out of work 27 weeks or more—for the years 2007 through 2011. Both measures shot up during the crisis and remained very high years later, indicating a labor market in which it remained very hard to find a job. As of March 2013, unemployment remained high at 7.6%, with the percentage of long-term unemployed at 39%.

Unemployment in the Aftermath of the 2008 Crisis After 2008, the unemployment rate increased dramatically and remained high. Long-term unemployment, measured by the percentage of the unemployed who were out of work for 27 weeks or longer, increased at the same time. By 2011, almost half of all unemployed workers were long-term unemployed.

Source: Bureau of Labor Statistics.

This outcome was, sad to say, about what one should have expected given the severity of the initial financial shock and the historical experience with such shocks. In fact, the U.S. experience with unemployment almost exactly matched the average performance of past economies that had suffered major banking disruptions. America, observed Kenneth Rogoff (whose work we cited earlier), was experiencing a “garden variety severe financial crisis.”