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Will Full Employment Ever Return to Detroit?

Just after the Labor Department announced that the national unemployment rate had fallen from 9.8 percent in November to 9.4 percent in December, Federal Reserve Chairman Ben Bernanke recently told the Senate Budget Committee that “[i]t could take four to five more years for the job market to normalize fully.”

For the nation as a whole, that seems reasonable. Suppose the labor force grows at the same rate it has over the last decade, an average of 0.07 percent per month. Suppose that the number of employed people (as measured in the Labor Department’s household survey, which is what’s used to figure the unemployment rate) increases by 297,000 every month, as it did in December. Then the nation’s unemployment rate will be just below 4 percent—a rate last achieved in 2000 and one that federal law sets as a target for full employment—in September 2014. Of course, if employment grows more slowly, then it will take longer for the nation to reach full employment.

But what will happen in metropolitan areas with unemployment rates far above the national average? Metropolitan Detroit, for example, had an unemployment rate of 13.5 percent in November (the most recent month for which metro unemployment rates are available). To many people in Detroit, full employment seems like a distant, perhaps unattainable dream. Even if Detroit’s unemployment rate falls as rapidly as the national rate, it will take until at least mid-2016 for its unemployment rate to reach 4 percent.

Surprisingly, though, Detroit’s unemployment rate will probably fall faster than that. The reason is that, faced with continued poor job prospects, many people will leave. That will reduce the size of Detroit’s labor force and lower its unemployment rate, even if job creation remains sluggish. In contrast, relatively few people leave the United States even during the worst economic times, and not very many drop out of the labor force because they can’t find work. (Since the beginning of the Great Recession in December 2007, the U.S. labor force fell by an average of only 0.008 percent per month.)

What’s likely to happen in Detroit? The metro area’s labor force has fallen by an average of 0.07 percent per month since the beginning of 2000, largely because the metro area’s population has declined. (The labor force fell at a slightly slower rate since the beginning of the Great Recession, perhaps because people who would otherwise have left the region couldn’t sell their houses.) Suppose that rate of labor force decline continues, and that the metro area’s employment rises by 2,164 every month, as it did in November. (That’s a slower job growth rate than the one I assumed for the nation as a whole.) Then the metro area’s unemployment rate will be just under 4 percent in July 2015--about a year sooner than it would reach that target if it fell in proportion to the national rate.

Even if employment grows more slowly than I’ve assumed (so that full employment takes longer to achieve), the moral of the story is clear. As economists Olivier Blanchard and Larry Katz pointed out almost 20 years ago, unemployment rates even out more quickly at the regional level than at the national level. People leave economically depressed regions and move to ones that are adding jobs rapidly. That lowers the unemployment rate in the depressed regions and raises it in the more vibrant ones. So it could take metro Detroit less than a year longer than the nation as a whole to return to something like full employment, even though its unemployment rate is now much higher than the nation’s.