Debt and Unemployment: Is Global Capitalism Responsible? – Part II

In declaring an end to recession, economists fall into two camps: One side, including economists with the Obama administration, maintains high rates of unemployment are cyclical and jobs will return soon; others contend that the US economy confronts fundamental restructuring, with massive unemployment lingering for years. This two-part YaleGlobal series examines economic debates over debt and unemployment. Long-term unemployment is alarming, notes economist David Dapice in the second article, with record numbers of Americans out of work for 27 weeks or more. Long-term domestic and foreign trends contributed to unemployment – foreign trade, outsourcing, technology replacing workers, as well excess capacity in real estate and financial industries. Whether long-term unemployment is temporary or lasting, US leaders must reduce deficits and spend wisely. Lingering US joblessness would require many families to adjust to a one-income way of life and means global producers cannot depend on US consumers as an engine of growth. – YaleGlobal

Debt and Unemployment: Is Global Capitalism Responsible? – Part II

Lingering high joblessness in US threatens global prosperity
David Dapice
Monday, April 26, 2010

Long wait: Job-seekers queue up in front of the employment bureau in California

MEDFORD: Economists have declared the US recession to be over, yet a deep gloom hangs like a miasma over the country. The reason: Stubborn near double-digit unemployment remains, much of it long-term. Economists with the Obama administration officials maintain that the unemployment is cyclical and will decline as the economy picks up steam, but the numbers – 15 million or 9.7 percent of Americans out of work while the economy produces about 300 thousand jobs per month – suggest otherwise.

If the high-level unemployment is indicative of a structural change taking place in the US, it would have profound impact on a world long used to regarding the country as the main engine of growth.

The US economy has gone through periods of restructuring before – from water-power to steam engines and horse-driven transport to automobiles and computers – with the US economy still leading. Increased globalization of production, supply chains, IT-driven manufacturing, along with the rise of large populous economies, have created a new context for a churning caused by massive unemployment.

The official unemployment rate jumped from 5 percent early in 2008 to 10 percent late last year and hovers close to 10 percent still. The total number of unemployed more than doubled from 6.7 million in March 2007 to 15 million in March 2010, an increase of 8.3 million.

However, the real story is long-term unemployment, those out of work 27 weeks or more. By March 2010 there were 6.7 million long-term unemployed – five times the March 2008 level and double the March 2009 level. The ratio of long-term unemployed to the total workforce stayed mostly below 1 percent for the last quarter century. That rate now approaches 5 percent, or 44 percent of all unemployed. This is unprecedented – the highest since data have been kept – and probably understated.

Most research shows that long spells of unemployment are much worse than short ones. People lose skills, drop out of the labor force, and face a difficult future when they are out of work for six months or more. Long-term unemployment contributes to a host of social problems, not limited to higher unemployment compensation. The explosion in long-term unemployment for the US has implications for the economic future of the nation and the world. 

Economists point to many special reasons for the sudden hike in long-term unemployment: Some families are trapped in homes where the mortgages are worth more than houses could sell for. Finding it hard to move, people stay in areas without much promise of finding new work. The share of US workers over 50 years old in the labor force has risen, and older workers often have specific skills that do not transfer well. Employers are reluctant to retrain older workers, anticipating a shorter period of payoff from the investment. The weak state of many lenders combined with near-zero short-term deposit rates and higher rates on government bonds means that banks are in no hurry to lend to small and medium firms. Finally, the extension of unemployment compensation to two years, while necessary, probably keeps some families waiting for better times rather than moving, pursuing new skills or accepting lower-paying jobs. 

However, these factors do not explain a fivefold increase in long-term joblessness, And economists disagree about the extent to which the longer-term causes of such deep unemployment are cyclical or structural: The ranks of long-term unemployed could quickly drop back to normal levels as the economy picks up, or some underlying change in the structure of the economy may require new interventions to lower the numbers, even with an economic recovery.

Christina Romer, the chair of the US Council of Economic Advisers, recently declared that the disturbingly high long-term unemployment rate is cyclical and not a “new normal.” A number of economists and investment managers, such as former Robert Reich, former Labor Secretary with the Clinton administration, and Mohamed El-Erian, manager of Harvard’s endowment who left before its drastic plunge, argue that a structural shift may be underway, one that could require time and painful adjustments. El-Erian suggests it may be six years before the unemployment rate falls to 7 percent.

There’s little doubt that the US economy of 2007 had too many workers in finance, construction and automobile manufacturing. The number of jobs in these sectors has fallen sharply and won’t soon return to previous peaks. To the extent that workers are trapped in their homes, older and less flexible, many struggle to adjust and, unlike during previous episodes of structural change, cannot find alternatives in small or medium firms.

Exactly how much of the long-term unemployment is due to any of the special domestic features – or others such as foreign competition, outsourcing and the changing nature of IT-driven industry – is unclear. If the real estate and banking problems work themselves out in the next year or two, and many older workers start to retire, perhaps the numbers of long-term unemployed will plunge as quickly as they rose.  

On the other hand, if some combination of foreign trade, outsourcing and technology – replacing middle management with computers and sophisticated information systems –bear greater responsibility, the pessimists will be prescient. The ability of large firms to increase their profits amidst falling sales suggests that they have found new ways to eliminate middle management not readily available a few years ago. There may also be some interaction between outsourcing, the internet and other technologies that allow management to control work flows even when someone is not physically present. Older workers who failed to save for retirement compete with younger workers for positions. These trends are not new, of course, but they might have been hidden by the bubble of the internet/IT cycle under former US President Clinton and the real estate/credit bubble under former President Bush.

One clue that these are long-term trends comes from real median household income. After rising erratically from the last great recession in the early 1980s to 2000, real median income has stagnated and even declined this decade, lower in 2008 than in 1998 or 2000 and certainly falling again in 2009. Much of this real income decline is due to the rapid rise in health-care costs, which employers partly absorbed. But real compensation, including wages and fringes, rose less than half as much as productivity since 2000. Since productivity growth has remained high, it’s likely that a structural shift has been going on for some time and the relative demand for less-educated or skilled labor is falling. This is consistent with the worsening of income distribution and inequality at or close to all-time highs.

Unless something changes, there will be an underclass of millions of families who wanted to and did work in the past but fail to find work now. Massive reeducation and retraining and new education programs for the young would be needed for a new economy. The luster of the US market for foreign exporters, too, could fade with a depleting rank of middle class. Rather than pass out stimulus funds to kick-start a stalling economy, the government would have to invest in building the structure of a new one. Given limited fiscal space and the need to reduce deficits, spending must get smarter and not just larger.


David Dapice is associate professor of economics at Tufts University and the economist of the Vietnam Program at Harvard University’s Kennedy School of Government.
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