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
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.