James Pethokoukis

Politics and policy from inside Washington

Is America stuck with high unemployment?

Oct 5, 2009 20:02 UTC

Is there a “new normal” for the American labor market? Are the days of an unemployment rate of just 4 to 5 percent a thing of the past?

That is the contention of some economists who see the sharp rise in joblessness during this recession as a warning sign of structural changes in the job market.

Yes, the U.S. unemployment rate of 9.8 percent is as high as it’s been since June 1983. And if you add in discouraged workers and those working part-time who would prefer a full-time job, the unemployment rate is 17 percent.

But it’s not just that unemployment is high. It’s that it’s far higher than what economists would have expected given the depth of the downturn.

The current unemployment rate is 5.4 percentage points above the nadir of the previous expansion. (During the terrible 1981-82 recession, by contrast, unemployment rose just 3.6 percentage points, although the peak was higher at 10.8 percent.)

According to an economic rule of thumb called Okun’s Law, which analyzes the relationship between unemployment and economic growth, peak unemployment should have been more like 8 percent. Indeed, that was the White House forecast at the start of the year. If Okun’s Law no longer works, that would be a sign of a tectonic shift in the labor market.

As would the findings of Jacob Funk Kirkegaard, an economist at the Peterson Institute for International Economics. After a sector-by-sector analysis of the U.S. economy, he concluded that such industries as finance, retail trade, publishing and broadcasting are suffering from structural job losses that won’t likely turn around with an expanding economy.  What’s more, the employment share of industries seeing net structural employment losses during the current cycle is 36.2 percent, the highest level since the early 1950s.

And the special skills of workers from those sectors may be mismatched for higher-potential industries like healthcare and education. Once fiscal and monetary stimulus abates, Kirkegaard concludes, “the U.S. labor market is in for a long, hard slog.”

America’s new natural rate of unemployment may be more like 7 percent rather than roughly 4.5 percent. If so, then Kirkegaard’s policy recommendation of new spending on worker retraining is probably a smart one.

Then again, the U.S. economy and its marvelously flexible labor market have shown a knack for dealing with structural change without the government. Until the financial meltdown, the unemployment rate was below 5 percent despite the disappearance of 3.5 million manufacturing jobs during the decade to offshoring and
automation.

To JPMorgan Chase economist Jim Glassman, that performance “demonstrates that permanent job losses don’t have to stand in the way of bringing unemployment back down.”

Moreover, the high U.S productivity rate is a long-term plus for the labor market because it shows America’s innovative capabilities remain robust.

Not that government investment in job training, as well as infrastructure and basic research aren’t important as well. Reducing an onerous corporate income tax is also critical.

The deep resilience of the American economy may surprise the pessimists.  But we won’t know for some time. The unemployment rate typically peaks around 18 months after a recession concludes. So if the current downturn ended in June, we will be well into 2010 before we have a firmer feel on whether the “new normal” is here to stay.

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A second stimulus?

Oct 5, 2009 14:37 UTC

A NY Times story by my pal John Harwood hints at a second stimulus package may be brewing:

Publicly, White House aides and Congressional leaders have responded with incessant attempts to highlight benefits from the $787 billion economic stimulus package they enacted earlier this year. Privately, Mr. Obama’s economic advisers are sifting options for a new package of tax cuts and other job creation measures to be unveiled in next year’s State of the Union address — or earlier if pressure for action becomes irresistible.

Me:  They certainly won’t call it “stimulus,” which is a toxic word these days. I could see more aid to state and local governments, an expanded housing credit, expanded unemployment benefits. They could surprise with a payroll tax cut. But any pricey packages could be met by a negative bond market reaction. They would really, really like to avoid doing this.

When the US labor market will begin to recover

Oct 5, 2009 14:13 UTC

Ed Yardeni has been crunching the numbers:

Based on the previous two cycles, employment might recover within the next 11-21 months after June, or between May 2010 and March 2011! It fell 289,000 during the 11 months following the recession trough of March 1991 and 1.08mn during the 21 months following the November 2001 trough. So far, it is down 768,000 from June through September. A similar analysis suggests that the unemployment rate should peak 15-19 months after June, or sometime between September 2010 and January 2011!

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