The Unemployment Picture

"Moving on is a simple thing; what it leaves behind is hard. "
Dave Mustaine

Paper thin, tepid, anemic; these are the words being used to describe the American economic recovery. Why are so many experts so cautious when the recession is officially over? Because this is unlike most post World War II recessions.

Most recessions are caused by tight monetary policy. The economy tends to turn around as soon as interest rates fall and more money is available to banks and borrowers. This recession was caused by loose monetary policy and bad lending practices. So just lowering interest rates (which are already historically low) will not help. The Federal Reserve has resorted to purchasing bonds (QE2 or “Quantitative Easing Round 2”) to try and pump more money into the system but, this will have only a limited effect.

A quick fix is not possible this time. The unemployment rate is emblematic of the problems facing the U.S. economy. The unemployment rate in December did drop to 9.4%. However, only 103,000 jobs were created. The U.S. economy needs to create 125,000 a month just to keep pace with population growth. A strong economic recovery really requires job growth of over 200,000 a month. So currently we are only creating jobs at half this rate.

Another reason that the unemployment rate dropped from 9.8% to 9.4% in December is many people just stopped looking for work. The real unemployment rate is estimated to be over 16%. To put this into perspective that would be as if the whole state of California were unemployed.
This is a new problem in the U.S. Unlike Europe, we are not used to dealing with long term chronic unemployment. The average unemployed worker in December had been out of work for 34 weeks, an increase of 19% from a year ago. The percentage of unemployed that have been out of work for over 28 weeks increased to almost 45%.

The government hopes that its stimulus programs will encourage companies and corporations to start hiring again. However, this may not fix the unemployment problem because many businesses are already looking for new employees and are having a difficult time finding qualified applicants. The Department of Labor reported in the fourth quarter that there are more than 3 million new job openings. If all those positions were filled the official unemployment rate would fall below 7%. So why aren’t these positions being filled?

Many economists believe that there is a mismatch between the job candidates’ skills and the qualifications employers require. This type of unemployment is notoriously difficult to fix. It is a shift in an economy from one set of jobs to another which require different skills.
A new report by Godofsky, Van Horn and Zukin from the Rutgers University’s John J. Heldrich Center for Workplace Development follows workers who have been displaced. It tries to capture the state of those unemployed during the Great Recession by interviewing workers unemployed in August 2009 and then re-interviewing them in March 2010 and November 2010. The results were startling. By November 2010, 54% of the participants were still unemployed. In addition, 13% had given up looking. In other words, 67% of those unemployed in August 2009 had not found a full time job.

For the one-third that had successfully found employment, it was not a bed of roses. Only 43% of the employed found jobs in a few months and over a third had been out of work for over a year. In addition, more than half the re-employed say that their new jobs will not allow them to get by financially and most were still looking for a better job. A third said that they took a reduction in fringe benefits. Over 40% had to accept work in a different field and almost 70% of these workers took a pay cut.

Only one-third of those unemployed in August 2009 believe that they will recover financially and return to where they were before the Great Recession. Over 80% say their finances are in fair to poor shape. It is not a pretty picture. Those displaced by the Great Recession are falling out of the middle class, and it is unlikely that they will ever regain their footing.

I would submit however, that the Great Recession only accelerated these dislocations in the labor market. It is ultimately the pace of innovation and technological change that is causing dislocations in the U.S. labor market. Jobs for unskilled labor are fast disappearing but so are many middle management jobs. Technology allows companies to do more with fewer workers and as a result flatten their organizations by eliminating the middle.

In addition, jobs can travel anywhere due to technology. So now many skilled workers are competing with workers located all around the world. New technologies create new jobs as they destroy others. It is this pace and these dislocations resulting from creative destruction-ism that is so unsettling. We see the results of this accelerating upheaval in our own lives and those around us. New statistics show that the chance that someone in your family will suffer a cut in pay or lose their job in any given year has increased to 26%.

The lesson from all this is to invest in human capital. Workers need to keep investing in their own training and update their skill set. Since it is now commonplace for workers to be constantly changing employers, it will become less common for companies to pay for or provide anything but direct skill training. So each person will need to actively manage their education and retraining through their entire career. Retraining and re-inventing ourselves will become imperative in order to stay employed and have a forward moving career.
The good news is that America continues to be the global leader in innovation and new ideas. The robustness of U.S. ingenuity and creativeness is the envied around the world. The way out of our current economic malaise is to innovate our way out of it. This will only further accelerate the pace of change, but hopefully more jobs will be created than destroyed.

But how will the least skilled be re-employed? Since the least skilled vie for jobs with unskilled labor around the world, their plight will not be easily resolved. To attract unskilled jobs to this country the cost of labor must drop to be competitive with the rest of the world. So in the long term unskilled labor will continue to experience a declining wages. Only when the cost of labor is competitive will manufacturing jobs return to this country. The good news is that manufacturing jobs have begun to return but the bad news is that the jobs are at reduced wages and benefits.

The global economy will continue to repair itself and the unemployment rate will fall modestly in 2011. There will still be bumps along the way. Rising interest rates may cause the bond market to perform badly. Rising food and energy markets will hit the pocket-books of the poor and middle classes hard while their salaries stagnate. However, falling wages will keep inflation moderate. The economy will continue to grow, just slowly. Don’t expect a miracle cure. The economy will keep progressing through rehab but it will take years not months.