Report | Jobs and Unemployment

American Jobs Plan

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Understanding the Jobs Crisis

Almost 16 million Americans are out of work. They are our husbands and wives. Our children, our parents. Our neighbors. The supply of willing workers is overwhelming, but we don’t have the demand to match. Americans want to work. Putting the American people back to work is not only an economic imperative, but a moral one as well. Americans value hard work, independence, and personal responsibility. American workers are remarkably resilient and have an unrivaled work ethic. In the face of these challenging economic times, Americans who have jobs are working hard, gaining new skills, caring for their parents, and providing for their children. Americans who don’t have jobs are doing everything they can to find work. Their quiet resilience has been a little-noticed source of our nation’s strength and it can also be a wellspring for our nation’s renewal.

  • The United States is facing its worst unemployment crisis of the last 70 years. Nearly 16 million Americans are out of work, one-third of whom have been jobless for over six months. Another 9.3 million Americans are working part time because they can’t find the full-time jobs they want and need. The jobs shortage is so severe that there are now six unemployed workers for every job vacancy—double the ratio in the prior recession of the early 2000s.
  • The American Recovery and Reinvestment Act passed earlier this year helped to pull the economy out of its nosedive and to dampen mounting job losses. Still, the jobs crisis has persisted, and it is likely that unemployment will remain above 8% even two years from now in the absence of bold and decisive action to create jobs. The employment situation is an economic and moral crisis for the nation and requires an adequate, comprehensive response by the federal government. By itself, the private sector is unable to create jobs in the numbers the United States needs for a robust, full economic recovery.
  • The Economic Policy Institute recommends a five-point American Jobs Plan to create jobs and stem the unemployment crisis. The plan calls for the nation to strengthen the safety net (including unemployment compensation, COBRA health coverage, and nutrition assistance); provide fiscal relief to state and local governments; make renewed investments in transportation and schools; support direct creation of public service jobs; and establish a new job creation tax credit.
  • The American Jobs Plan is an efficient and effective way to create jobs. We estimate that the plan will create at least 4.6 million jobs in the first year, at a total first-year gross cost of roughly $400 billion. This entire cost can be recouped within 10 years by enacting a financial transactions tax (FTT), which would take effect three years after enactment. An FTT is a highly progressive way to raise revenue by imposing a small tax on the sale of stocks and other financial products.

Introduction: The jobs crisis

The United States is facing its worst unemployment crisis in 70 years. In October, the unemployment rate reached double-digits for the first time in a quarter century; now nearly 16 million Americans are unemployed. Another 9.3 million are working part time even though they want full-time work. Overall, the nation has an underemployment rate of 17.5%, or 27.4 million people.

Among the 15.7 million jobless workers, one in every three has been out of a job for six months or more. These long-term jobless represent 3.6% of the total labor force, far exceeding the previous peak of 2.6% set in June 1983. More than 2 million workers have already been unemployed for more than a year. There is only one job vacancy for every six people unemployed.

Average unemployment rates mask an even bleaker reality for many Americans. Among African American and Latino workers, the unemployment rate has reached 15.7% and 13.1%, respectively. In Michigan, where the unemployment crisis has taken its toughest toll, unemployment reached 15.1% in October 2009.

Unemployment among men has reached 11.4%. Among blue-collar workers, unemployment is 50% higher than the national average. White-collar unemployment is 6.8%, which may seem low but is higher than all but the two worst months of the 1980s recession. And while college graduates have a comparatively low rate of unemployment (4.7%), it is still the highest jobless rate on record for that group.

Unemployment would be even higher had there not been an actual drop of 903,000 in the size of the labor force over the last year when normally we would expect labor force growth of nearly 1.5 million. A primary reason for this contraction is that the dismal labor market convinced many people to give up looking for work; these labor force dropouts are therefore no longer counted among the unemployed. Nevertheless, the steep rise in unemployment, up 5.3 percentage points since the start of the recession, is even greater than the rise in unemployment in the deep recession of the 1980s.

The United States has lost 8 million jobs (5.9% of all jobs) during the recession so far, the sharpest drop since World War II. But bringing back even 8 million jobs would not return us to the pre-recession unemployment rate of 4.9% because the population has grown since then. Each month we need to create 127,000 jobs just to keep unemployment from rising. Therefore, we actually need 10.9 million new jobs to get us back to 4.9% unemployment.

The Economic Policy Institute anticipates that unemployment will keep rising until mid-2010 or even until the end of 2010, topping out at 10.5% or higher. According to some forecasts, the unemployment rate may still be as high as 8% at the end of 2011. To offer some context, at no point in the 25 years preceding this recession did the unemployment rate reach 8%. It is an unacceptably high unemployment rate that policy makers must address.

Since people flow into and out of unemployment, over a third of the workforce will experience a spell of unemployment or underemployment during 2010. Among African Americans and Latinos, about 40% of workers will be unemployed or underemployed at some point in 2010.

Wage deceleration and lost income

High unemployment hurts even those who retain their jobs because wages grow more slowly and furloughs, reduced hours, and losses in benefits become more common. Gallup reports that a third of workers fear their wages will be reduced. A September 2009 survey of voters’ views on the recession, jobs, and the deficit, conducted for the Economic Policy Institute by Hart Research, found that 44% of households have already experienced job loss or cuts in pay or hours.

The recession will reduce incomes for families at all income levels, but it will hit low-income families the hardest. Over the four years from 2008 to 2011, average low-income families will see their incomes decline by $1,200 a year, for a four-year total income loss of $4,600, compared with what they earned in 2007, before the recession began. In other words, low-income families will have earnings in 2011 that are 7.2% lower, on average, than their 2007 earnings. An average middle-class family will see losses of roughly $3,500 a year for those four years, with incomes in 2011 worth 5.6% less than their 2007 levels.

Widespread economic hardship and harmful scarring

Economic recessions are often portrayed as short-term events. However, as a substantial body of economic literature shows, the consequences of high un
employment, falling incomes, and reduced economic activity can have lasting consequences. For example, job loss and falling incomes can force families to delay or forgo a college education for their children. Frozen credit markets and depressed consumer spending can stop the creation of otherwise vibrant small businesses. Larger companies may delay or reduce spending on research and development.

In each of these cases, an economic recession can lead to “scarring”—that is, long-lasting damage to individuals’ economic situations and the economy more broadly. More specifically, recessions can cause long-term hardships for families and lasting economic damage in the following areas:

  • Educational achievement: Unemployment and income losses can reduce educational achievement by threatening early childhood nutrition; reducing families’ abilities to provide a supportive learning environment (including adequate health care, summer activities, and stable housing); and by forcing a delay or abandonment of college plans.
  • Opportunity: Recession-induced job and income losses can have lasting consequences on individuals and families. The increase in poverty that will occur as a result of the recession, for example, will have lasting consequences for children, and will impose long-lasting costs on the economy. High and rising unemployment could drive up the child poverty rate from 18% in 2007 to around 27% over the next few years. For black children, poverty could rise from the already dismal level of one-third in 2007 to more than 50% in the year or two ahead.
  • Private investment: Total nonresidential investment is down by 20% from peak levels through the second quarter of 2009. The reduction in investment will lead to reduced production capacity for years to come. Furthermore, since technology is often embedded in new capital equipment, the investment slowdown can also be expected to reduce the adoption of new innovations.
  • Entrepreneurial activity and business formation: New and small businesses are often at the forefront of technological advancement. With the credit crunch and the reduction in consumer demand, small businesses are seeing a double squeeze. In 2008, for example, 43,500 businesses filed for bankruptcy, up from 28,300 businesses in 2007 and more than double the 19,700 filings in 2006. Only 21 active firms had an initial public offering in 2008, down from an average of 163 in the four years prior.

A recession, therefore, should not be thought of as a one-time event that stresses individuals and families for a couple of years. Rather, economic downturns will affect the future prospects of all family members, including children, and will have consequences for years to come. On the flip side, spending now to create jobs has beneficial effects that ripple over the long term.

The American Recovery and Reinvestment Act

The American Recovery and Reinvestment Act enacted in February 2009 was by necessity the largest economic intervention by the federal government in generations. Recovery Act investments slowed the economy’s free fall, created between 1.1 and 1.5 million jobs by the end of September, and made economic recovery possible.

Matters would have been far worse if Congress had not passed the Recovery Act. The Recovery Act had already pumped $175 billion into the economy by the end of September and generated about 170,000 to 235,000 jobs each month since April. The fact that the job situation remains so dismal reflects how deep a hole we were in.

The economic downturn has turned out to be far worse than what economists were predicting a year ago. At the time of the presidential election, the consensus forecast among economists was that unemployment would hit 6.9% in early 2009. But it hit 8.1% in the first quarter and reached 8.5% in March, before the ink was even dry on the Recovery Act.

The economy was headed steeply downward last winter and in early 2009. The Recovery Act interrupted that decline and then started to create actual growth during the summer. In the second quarter of 2009, the economy’s only area of growth was government consumption and investment, which increased by 11.4% over the previous quarter. Private consumption, investment, and net exports were all negative. Without the Recovery Act, total government expenditures would have fallen and gross domestic product would have dropped 3.7%. Instead, the economy declined by only 0.7%, and the smaller drop saved between 600,000 and 750,000 jobs in that quarter alone.

A note about the deficit

Critics argue that the Recovery Act and the rescue of the financial sector have exhausted our ability to pursue further fiscal solutions—government spending and tax cuts—to fight the recession.

But as a matter of economics, the government’s anti-recession spending so far has been less than half as large as Keynesian analysis calls for. University of California, Berkeley Professor of Economics J. Bradford DeLong and Nobel Laureate Paul Krugman argue that we cannot afford not to make another large investment to create jobs and accelerate GDP growth. These economists maintain that failure to intervene further could result in a “lost decade” of economic stagnation similar to that which Japan experienced in the 1990s.

The long-term costs of an extended recession will far outweigh the additional interest payments on the national debt required to fund a major intervention. Some of those costs are set out in the report, Economic Scarring: The Long-Term Impacts of the Recession, by EPI Research and Policy Director John Irons. The primary reason we have a large fiscal deficit at this point is that we are in a major recession. The best way to tackle the deficit is to generate more jobs and get the nation firmly on a path to recovery.

Generating jobs through additional spending or a jobs tax credit will raise the fiscal deficit for the next year or two. But this result is entirely appropriate in the context of the recession, and will not damage the economy. In fact, it will reduce the damage to future growth that occurs as a result of the recession’s impact on children’s learning, lost innovation, and reduced investment.

The urgent need for bold, decisive action

The Economic Policy Institute has detailed some of the structural economic problems—including unprecedented income inequality, the disconnect between worker pay and productivity, and feverish financial sector growth—that helped precipitate this crisis. But it bears noting that the average American worker was not faring so well even before this recession began. We encourage stakeholders interested in long-term economic reforms to learn more by visiting for links to more resources. This report, however, focuses on the immediate jobs crisis and the need for a comprehensive plan to spur job creation.

The problem immediately confronting the economy is that resources are under-utilized. Too many people are unemployed and too many facilities are idle. The solution is to increase demand. People have lost vast amounts of wealth and income and cut back on spending. Businesses have lost customers. Exports fell as the world economy declined. That vicious cycle is continuing, though at a slower pace, and that is why government can provide an effective intervention. At this point, the greatest need is more jobs. As long as employers have only a single job opening for every six unemployed workers, the economy will continue to struggle.

The American people overwhelmingly support additional action to create jobs. The EPI/Hart Research survey found that more
than three-quarters of respondents (81%) feel that more should be done to address the jobs crisis.

When asked about the largest economic problems facing the United States, respondents most commonly cited unemployment (53%); the deficit was a distant second, with only 27% rating it as one of the nation’s most important economic problems. The poll showed that Americans believe the Recovery Act has helped, but they also want to see more direct action to create jobs. Large majorities support a public jobs program and job creation tax credits, and a majority supports more aid to the states.

The country’s jobs crisis requires immediate attention. More should be done to generate robust job growth, restore incomes, create consumer demand, and drive sustained economic growth.

Large-scale job creation in the next two years will require bold, decisive action such as the American Jobs Plan. Implementing the American Jobs Plan would create or preserve at least 4.6 million jobs, bringing us a long way toward creating the 10.9 million jobs we need to return to pre-recession unemployment levels.

The American Jobs Plan has five components:

1. strengthening the safety net;

2. providing fiscal relief to the states and local governments;

3. increasing investments in transportation infrastructure and school repair and modernization;

4. creating public service jobs;

5. and enacting a new job creation tax credit.

This report discusses in detail each of the five components of the American Jobs Plan and describes how a modest financial transactions tax can recoup the entire cost of the plan within 10 years.

Further Reading: Understanding the Jobs Crisis

Generating Jobs for a Robust Recovery by Lawrence Mishel (Oct. 20, 2009 / Policy Memo #151)

Economic Scarring: The long-term impacts of the recession by John Irons (Sept. 30, 2009 / Briefing Paper #243)

How We Know the Recovery Package Is Helping by Josh Bivens (Issue Brief #265)

The Recession’s Hidden Costs by Heidi Shierholz, Lawrence Mishel, and Andrew Green (Sept. 4, 2009 / Briefing Paper #240)

Lawrence Mishel: What the Economy Needs Now (vdeo and slideshow from Momentum 2009)

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