First, let's examine when the recession actually occurred. One rule-of-thumb definition of recession is that in order to have a recession you must have 2 consecutive quarters of negative GDP growth. Basically, this means that the total value of all goods and services (+/- foreign trade) produced in a quarter went down. This is equivalent to "the economy getting smaller." The chart below shows that we were really in a recession from approximately January '08 to about June '09 (+/- a couple of months on each end). Right now, our economy is probably back to about the same size that it was before the recession (roughly). So, why don't we have all the jobs back?
Here's a chart of US GDP growth over the past few years (just look at the top line):
As long as the economy is getting bigger, there is a reasonably good chance that all that increased activity will turn into income for someone (through paychecks, government spending, stock dividends, etc...). When people spend that additional income, they are likely to cause businesses to add workers. Sometimes there is a lag, and it's not always that simple, but that's the basic idea. So, if the economy is growing at 3% per year, jobs are probably being added (I'm ignoring productivity growth for today). The population is also growing (due to immigration, mostly) and so there is more or less a match between the number of job seekers and jobs available (on an aggregate level). Back in 2005 and 2006, for example, companies were employing lots of people who were building many products and selling many services. In fact, because people were borrowing so much and saving so little, almost every single dollar that was earned was subsequently spent on something else, so it took a lot of "jobs" to produce all those products and services.
One complication is: what if people save the extra money instead of spending it? On the surface, this would seem to allow for "growth" without jobs. Is that exactly what's happening now, you might ask? In practice, though, money saved is invested. Either businesses borrow against these savings to expand or individual households save this money for later. Saving money for later obviously delays the spending of the same dollars on cars, iPods, and Starbucks, but businesses are smart enough to handle this case. It takes many years to develop some products or build new houses or stores, so if all that money were really being saved up to spend next year or even next decade, some economic activity would start today to plan for how all that future spending is going to happen. So, on the surface, the fact that our savings rate has gone up would seem to explain the shrink in GDP. But, if we imagine that businesses are smart enough to account for this, then it doesn't explain anything.
The problem we're having today is that our savings rate as a country was SO LOW (at times it was probably negative) during the last decade, that we took on lots and lots of debt. Although the personal savings rate (as opposed to the total savings rate, which includes businesses and the government) now is a much more respectable 5-7%, that savings rate is something of an illusion. People aren't really putting this money into a savings account; mostly, they're paying off old debts (including mortgages). Savings is really the difference between income and spending. It can be money that's put into a savings account or money that pays off a car loan. Both count as "savings."
Let's say that of every $5 "saved" by households in the US right now, $4 is going to pay down mortgages and other debts that originated some time between 2000 and 2009. The "job" that built the house or iPod purchased back then is finished; the work is already done. That means only $1 of that money is being "saved" for future consumption (like retirement savings, saving for a rainy day, saving to buy a new house, etc...).
Let's call the current personal savings rate 4% (the approximate average over the last several quarters). Next, let's pretend that the consumer sector of GDP (about 2/3 of US GDP is personal consumption) is exactly equivalent to the group that's doing the personal or household savings. So, that 4% savings rate could represent about 2.68% (0.04*0.67) of growth potential for the US economy as a whole. To simplify, we could think of that personal savings rate of 4% as representing enough dollars to cause a 2.68% increase in total GDP next year (or spread out over many future years). But, if 3/4 of that amount is really going to pay off last year's debts, then the amount that's really being "saved" to be invested or spent represents a potential contribution to GDP of only about 0.67% in the future.
So, is it a wonder that businesses aren't adding jobs? They're seeing that, right now, people are saving instead of spending. However, they're also seeing that what they're "saving" can't be spent in the future on new goods and services; it was already spent in the past. That money is just paying for all the stuff people have already bought. So, the same businesses aren't eager to add workers, because they don't see very great prospects for growth. Incidentally (and not surprisingly), some of the few areas that have done better during this recession are repair and service shops. This makes perfect sense; all the money people *are* spending is going back into old purchases. In the case of cars, at least this causes more mechanics to be employed. For many things, though, it has no positive impact on current or future employment.
