The danger of a lost generation

July 24, 2009

– Christopher Swann is a Reuters columnist. The views expressed are his own —

NEW YORK, July 24 (Reuters) – For the first time in three generations, Americans across the nation are facing the threat of long-term unemployment. Already more than one in four jobless Americans have now been out of work for more than six months, the highest level since records began in 1948.

For both individuals and national economies, long-term joblessness has proved to be extremely corrosive. Skills atrophy after extended periods of enforced indolence. Then, when an economy recovers, these workers are no longer in a position to fill new jobs.

As a result the potential maximum speed at which the economy can grow declines, and the workers themselves come to be seen as “damaged goods.” Those unlucky enough to be graduating in 2009 may find that their salaries never match those of similarly qualified peers who finished in 2006.
To his great credit, President Obama has been quick to spot the danger. Under the administration’s stimulus package, the unemployed can now claim benefits well beyond the standard six months. In some badly afflicted states, insurance will last up to a year and a half.

The government is also offering $4 billion in funds to retrain workers. Tax breaks in the package aim to make it more affordable for young people to sit out the recession in school. Another $12 billion for community colleges has the same goal.

Yet even this heroic effort may be too little, too late for many Americans.
The closest analogy to America’s current unemployment crisis is probably Japan. Here too was a nation accustomed to minimal long-term joblessness. In Japan the lost decade produced a lost generation.

Faced with a “hiring ice age,” graduates settled for lower status or temporary jobs. By the time companies were in the mood to hire again in bulk around 2007, they chose fresh graduates. Many of Japan’s thirtysomethings never caught up.

A multitude of academic papers suggest that an early bout of long-term unemployment can have an even more pernicious result. According to a recent study by Tom Mroz at Clemson University, a six-month spell of unemployment at the age of 22 tended to reduce wages the following year by eight percent.

More worryingly, almost 10 years later these workers were still paid about three percent less than their peers, even controlling for education, region and personal characteristics. Other studies have shown an even more powerful hit, with wages still about 10 percent lower five years after the initial period of joblessness.

“Youth unemployment creates permanent scars rather than temporary blemishes,” says Dartmouth Professor David Blanchflower. An unfortunately timed demographic bulge means that there will be an unusually large number finishing school over coming years. For more experienced workers, there is a risk of permanent displacement from the labor force. This risk is especially great for workers in financial services — an industry that is unlikely to grow back to its peak size any time soon.

This is a problem that few nations have ever had much success in combating. Even before the latest economic crisis struck, half of the jobless in Germany and Italy had been out of work for more than 12 months. Japan, too, has had trouble bringing its long-term jobless rate down. “Getting a job during the crisis in most countries is becoming an even more daunting challenge,” said Stefano Scarpetta, head of employment at the Organization for Economic Cooperation and Development.

The United States may have better luck thanks to the flexibility of its labor market. Still, Obama has been right to focus heavily on training.

Even if the skills learned in community colleges prove to be useless, avoiding a damaging period of inactivity may offer value for money for taxpayers in the long run. For many, the best way to avoid being damaged by a weak job market will be to stay out of it.

For previous columns, Reuters customers can click on [SWANN/]
(Editing by Martin Langfield)
((christopher.swann@thomsonreuters.com))

http://blogs.reuters.com/christopher-swann/

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