As we pointed out then, Figure 13 plots the quarterly unemployment rate in our baseline scenario and the three alternative scenarios. It shows the series peaking at over 9.8 percent at the height of the most recent recession in the fourth quarter of 2009. Since that quarter, the unemployment rate has fallen steadily. It had reached approximately 7.9 percent by January 2013. Under the conditions posited in the baseline scenario (see black line), this decline would be interrupted, with unemployment rising gradually once again to nearly 8.0 percent by the third quarter of this year, before declining again for the rest of the simulation period. Even at the end of that period, the official unemployment rate would stand at approximately 6.6 percent, in still excess of the Federal Reserve’s threshold for possible tightening.
In scenario 1 (orange line), the goal of 6.5 percent unemployment is achieved within two years, but the lower goal of 5.5 percent still has not been reached by the end of the simulation period, nearly four years from now. The next best scenario for the labor market is scenario 3 (gray line), which combined modestly increased fiscal stimulus, higher private sector borrowing, and higher growth rates for our trading partners. This set of changes results in unemployment falling below Romer’s proposed threshold of 5.5 percent in 2015Q3 and reaching 4.9 percent by the end of the projection period. The fastest and deepest reduction in unemployment is obtained in scenario 2 (green line), which featured the highest levels of fiscal stimulus. By construction, projected unemployment is just slightly above 5.5 percent at the end of 2014 in that scenario. Two years later, in the last quarter of the projection period, it reaches about 4.6 percent, still not as low
as it was in 2007, just prior to the recession’s start. Labor market recovery thus requires four years in the scenario that assumes the highest levels of fiscal stimulus and takes even longer in each of the other scenarios.
--Lane