James Pethokoukis

Politics and policy from inside Washington

Is America stuck with high unemployment?

October 5, 2009

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.

Comments

Very well put. I’ve written several articles about the un and under employment rates and that things will continue status quo as long as we continue to not produce goods in this country that are in competition with a global market. Pretty simple actually and it will no doubt lead to the ruralization of America once again in the coming years.

Posted by Frank | Report as abusive
 

I’m confused! Isn’t rising productivity (certainly a measure of innovation) a minus for employment, not a plus? More production per hour worked, same number of consumers seems to indicate a decreased demand for labor. Where is the error in this reasoning, James?

Posted by noname11 | Report as abusive
 

End of Bush tax cuts must factor into fiscal outlook for 2010 and forward. This will be a significant drag and is already being factored into investment decisions.

Posted by bobmagel | Report as abusive
 

The massive corrupt spending and debt. The Government takeover of huge chunks of the economy, the massive taxes on that will hit every American that isn’t on welfare will permanently damage the economy for a generation leading to European levels of permanent unemployment. Obama and the Democrats in Congress are permanently damaging our economy in a way that will leave millions unemployed for years!

Posted by valwayne | Report as abusive
 

Any business projecting out looking at Cap and Trade, the expiration of the Bush tax cuts, and taxes on their payroll to pay for healthcare reform, is it any wonder that jobs are not recovering? It really doesn’t take a degree in economics to figure this out.

Posted by Ruslyn | Report as abusive
 

Can anyone name one policy by the Obama administration that will actually help small businesses? Cap-n-trade and health reform will cost businesses more money, increased influence of big labor only hurts, allowing the Bush tax cuts to expire won’t help, driving up the national debt and raising taxes – all of this will hamper or drive business away from America. Of course double digit inflation will be the norm, at least until we get a new president.

Posted by Fred | Report as abusive
 

Unless we see the gap between the lowest and the highest earners narrow, the economy is going to have a difficult time recovering. The Bush tax cuts helped accelerate the pace of high wage earners and did nothing to pull up low wages. In fact, the Bush tax cuts cut out a chunk of the middle class which is vital to any nation’s economy.

If we remain a financial and service oriented market we are doomed to collapse. We have to manufacture or provide tangible items of value to create real wealth. The banking and financial gurus of America have messed things up and it doesn’t appear they are ready to change their ways.

Posted by Mike H | Report as abusive
 

Welcome to Europe! Our unemployment rate was artificially low. While people may have had full-time work, their wages were not on par, and therefore the low unemployment masked low average wages. Now that the low-end jobs are disappearing, particularly retail, and will not likely rebound in the near future, your estimate of 7% unemployment as the new norm sounds right. Its really where we should have been through the past decade. It is also more in line with other developed countries. The shift away from a consumer based society will be difficult for the consumer, but especially for the ones who depended on the consumer for employment.

Posted by Greg | Report as abusive
 

In thinking about employment, one problem with the paradigm is that workers must be given jobs instead of making their own jobs. There was a time when the unemployed could start a food stand (Carl Karcher) or sell tourist products on the wharf (Shell Oil) or a sandwich business (Paula Deen.) Today, with heavy regulation at every turn, none of these activities are legal options.

Workers can’t find work and they can’t make their own work either. Between high taxes which limit the dollars available for private enterprise and heavy regulation, there isn’t much Americans can do any more.

Farmers can’t grow crops, industrialists can’t build factories, furniture makers can’t use a myriad of paints or glue, when it comes to private enterprise, we have become a country of you can’t do that, or at least not without a huge investment outlay simply to test the idea.

Indeed, with the current proliferation of regulation and taxation, we may in time look back nostalgically to 7% unemployment, as we contemplate the new ‘new’ normal.

Posted by joni dahlstrom | Report as abusive
 

In thinking about employment, one problem with the paradigm is that workers must be given jobs instead of making their own jobs. There was a time when the unemployed could start a food stand (Carl Karcher) or sell tourist products on the wharf (Shell Oil) or a sandwich business (Paula Deen.) Today, with heavy regulation at every turn, none of these activities are legal options.

Workers can\’t find work and they can\’t make their own work either. Between high taxes which limit the dollars available for private enterprise and heavy regulation, there isn\’t much Americans can do any more.

Farmers can\’t grow crops, industrialists can\’t build factories, furniture makers can\’t use a myriad of paints or glue, when it comes to private enterprise, we have become a country of you can\’t do that, or at least not without a huge investment outlay simply to test the idea.

Indeed, with the current proliferation of regulation and taxation, we may in time look back nostalgically to 7% unemployment, as we contemplate the new \’new\’ normal.

Posted by joni dahlstrom | Report as abusive
 

The growth of economic restrictions by government, such as cap-and-trade or this health care mess, will fight against employment!

Posted by John D. Froelich | Report as abusive
 

I think double digit unemployment will be here to stay, because the govt cannot cure a debt problem by issuing more debt. Just look at what has happened in Japan. The deflationary credit collapse will continue to worsen as banks keep contracting lending due to falling home prices due to high inventory levels.

Posted by mthomas | Report as abusive
 

Jeremy Rifkin in his NY Times bestseller, The End of Work, a few years ago, and Mortimer Adler and Louis Kelso (of the University of Chicago and The Aspen Institute, respectively) many years ago in their seminal work , The Capitalist Manifesto, all predicted that the loss of jobs and the increase of real unemployment rates (not the massaged and compromised statistics we generally focus on now) will be increasing at a growing rate as capital and technology replace/ displace workers/labor at a higher rate than new technology can hire and integrate them into the work force.

This trend and economic reality has direct relevance and severe implications for the necessity of sufficient incomes and consumption in a mass production US and worldwide, and for the hopes for an economic recovery domestically and internationally. It is a grim and inexorable economic reality that the general press, and the respective political, economic, and labor powers that be ignore at our country\’s peril–current President included.

Bravo Mr. Pethokoukis, (your Greek forebears would be glad) for your highlighting and raising the right issue and asking the right question; and for at least your referencing Mr. Kirkegaard’s and the Petersen Institute’s work on the alarming net structural unemployment losses.

Please, if you would, also read and write about Messrs. Rifkin’s, and Adler’s and Kelso’s respective important works, and their very relevant observations on this timely, huge issue–that “cries out in the wilderness” for more attention and a more enlightened, sagacious response from our policy makers. Thanks.

 

The only reason unemployment was really low during the Bush years was because of the housing/finance bubble, not because our economy was so exceptional.

As Mike H. commented, unless we reduce the offshoring of manufacturing jobs, we will have very high unemployment rates for a very long time. How many service-related jobs can our economy possibly create, and will they allow people to enjoy a middle-class standard of living?

Americans have been enjoying a false prosperity which has come to an end. If we don’t accept that soon, we are going to become another Mexico, Brazil, etc.

Posted by marcc | Report as abusive
 

no

Posted by Camron Barth | Report as abusive
 

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