Wednesday, March 10, 2010
Unemployment's New Normal
While there is presently optimistic talk of "green shoots" and economic recovery, as far as employment goes, we're a long way from recovery. In fact, we're a long way from what has traditionally been viewed as normal.
There is a growing concern – perhaps even sentiment – amongst many economists that the US has entered a new normal in unemployment. Gone, perhaps, are the days of a standard 5-6% unemployment rate, replaced by a new normal of roughly 10% unemployment.
How long will this new "normal" last? By many accounts, perhaps the rest of this decade. There are a number of reasons why.
During the Great Recession, the US has seen almost a doubling in the share of the long term unemployed (meaning those who have been jobless for six months, or longer) to 40%. And the median duration of unemployment has doubled over the past year, according to OMB Director, Peter Orszag.
Collectively, nearly 16 million Americans remain jobless. That number doesn't include those who have lost unemployment benefits and are no longer counted. Nor does it count those who have part-time jobs but want full-time work.
When those people are included, a whopping 17% of Americans are currently under-employed or unemployed. According to respected analyst John Williams, the true number is 22%. That's a sobering statistic which gives an indication of just how bad the employment problem is.
Of particular concern, a total of 6.3 million Americans have been unemployed for at least six months, the largest number since the government began keeping track in 1948. That's more than twice as many as in the early '80s recession.
According to Lawrence Katz, a labor economist at Harvard, for every job that becomes available, about six people are looking. That creates an enormous amount of competition and leaves many out of luck.
It's a trend that's expected to continue. Many older workers of retirement age are putting off retirement out of necessity. That leaves fewer positions available for younger workers.
As it stands, there are about 1.2 million unemployed college grads in America. The average graduate is carrying $20,000 in student loans. Those loans can't be paid off without jobs.
According to the National Association of Colleges and Employers, job offers to graduating seniors declined 21 percent last year, and are expected to decline another 7 percent this year.
All of this has negative consequences for our consumer driven economy. Obviously, there is less consumption when fewer people are working, and there is less disposable income directed back into the economy. And it also means that there will be lower government tax receipts at both the state and federal levels.
And if unemployment remains stubbornly high, wages will also remain stagnant. That could create a negative feedback loop that continues to lower consumer spending and economic output.
Between 1989 and 1999, 21.7 million new jobs were generated. But due to the Great Recession, job creation was negative in the last decade, declining by roughly eight million jobs.
It's part of a long trend; job creation has been slowing for decades.
According to the Economic Cycle Research Institute, during periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased about 3.5 percent a year. But during expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually.
And it's taking longer and longer to recover from each successive recession. The last time the jobless rate reached double digits, in the early 1980s, it took six years to bring it down to normal levels.
According to the Federal Reserve, the jobless rate could remain as high as 7.6 percent in 2012. And it would take two or three years after that for the job market to return to normal, the Fed says.
By some estimations, that's a best case scenario.
Many workers were in low-skill jobs that are never coming back. Millions of Americans are unprepared for the 21st Century workforce. The jobs for unskilled and low-skill workers have been permanently off-shored to Third World nations.
We've lost our manufacturing base, so we won't export out way out of this recession and into a job recovery. As it stands, exports make up just 13 percent of our economy.
And the nation doesn't just have to make up the eight million, or so, jobs wiped out during the Great Recession; it needs to keep up with a labor market that requires the creation of about 125,000 new jobs each month. But we've lost jobs in 24 of the last 25 months. Obviously, we're way behind.
To provide some perspective of the hole we're in, consider this: the government says that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force. Naturally, that hasn't happened.
Businesses will first shift some part-time workers to full-time positions before engaging in any new hiring. And many businesses will be happy to maintain part-time workers because they cost less; no benefits and no overtime.
When so many people are out of work, there is no incentive for employers to offer wage increases or high starting salaries. Beggars can't be choosers, and many professionals are working in jobs for which they are considerably over-qualified.
Since the dot-com bubble burst in 2000, workers wages grew by a meager 13 percent over the next 10 years, adjusted for inflation. That was the slowest pace in five decades, according to Moody's Economy.com.
And, also adjusted for inflation, median household income has gone backwards, from a peak of $52,587 in 1999 to $50,303 in 2008, according to the U.S. Census.
In addition, interest rates will eventually rise from their abnormally low levels. When they do, that could also have a dampening effect on job creation and economic expansion.
Ours it a credit-based economy. Yet, banks are reluctant to loan after suffering massive losses, much of it brought on by their own greed and negligence. Last year, 140 banks failed. This year may be worse.
Meanwhile, consumers and companies, scarred by the recession, are likely to restrain borrowing, spending and investing for years to come. Consumers are strapped and burdened by debt. We will not spend our way out of this. Taken as a while, all of this will only perpetuate economic stagnation.
Yet, our government, which is mired so deep in debt, needs a robust economic expansion to climb out of the hole it's in. But that isn't happening. At the same time, millions more Americans are now receiving government support in the form of food stamps and unemployment payments just to stay afloat.
The costs of providing unemployment benefits to all these millions of Americans is enormous requiring states and the federal government to take on even further debt.
The White House estimated the cost of unemployment compensation to exceed $140 billion for fiscal 2010, which began in October.
The Labor Department projects that eight million Americans will exhaust their regular 26 weeks of unemployment benefits in 2010. And the government is now allowing benefits up to 99 weeks.
Unless millions of Americans get more education and new job training, those payments will have to go indefinitely. Many of the old jobs are never coming back. Our economy is simultaneously attempting to recover and restructure.
Even if the nation started adding 2.15 million private-sector jobs per year starting this past January, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, just to eliminate the current jobs deficit.
That seems highly unlikely. Sadly, our nation's unemployment problem will be with us for many years to come.