US employment malaise is ominous news

September 8, 2010

Todd Hirsch is a senior economist at Edmonton-based ATB Financial.

Photo: Troy Media

Maybe it’s proof that hope really does run eternal. Whatever it is, investors were grasping for good news last week as stocks rallied and sentiment turned solidly positive because the US lost only 54,000 jobs in August.

But aren’t economies that are coming out of recession supposed to be adding jobs? America’s labour market has been struggling, and for the past three months it has been shedding jobs. The unemployment rate ticked up to 9.6% in August, and it has been hovering very close to the 10% mark for some time.

But, amazingly, the markets took last week’s US labour report as good news because everyone was bracing for twice as many lost jobs.

US president Barack Obama put a good spin on it. “There are better days ahead . . . The month I took office, we were losing 750,000 jobs a month. This morning [Sept. 4], new figures show the economy produced 67,000 private sector jobs in August, the eight consecutive month of private job growth . . . That’s positive news.”

By focusing on job growth in the private sector (which were more than offset by losses in the government sector), the Obama was able to offer an upbeat message.

Still, the employment situation in the US is rapidly emerging as the single most serious barrier to economic recovery. Sure there are other problems—credit is still tight, the housing market is in the toilet, and the government’s deficit and debt are a growing headache. But all of these problems have their roots in the employment picture. If Americans could magically find good paying jobs, a lot of these other worries (credit, housing, tax revenue) would disappear.

Not only is close to a tenth of the US labour force not working, many more are “underemployed”—that is, working only part-time when they’d prefer to be working full-time, or working in low-paying jobs that do not adequately make use of their skills. Counting all unemployed and under-employed together, roughly one sixth of US households are in financial panic mode.

The bad news doesn’t end there. The duration of unemployment has risen in the US, helped somewhat by the fact that unemployment benefits have been extended in some areas to 99 weeks under the government’s stimulus plans. Admittedly, jobless benefits in the US are less generous than they are in Canada or Europe. Still, by offering nearly two years of support to the unemployed, the urgency to find work is reduced.

Other problems arise if workers are out of work for too long. Skills start to atrophy. People’s networks of work-related connections break down. Self-esteem evaporates. After a certain period of unemployment, some workers become nearly unemployable. This is particularly true for a portion of the US economy hit hardest by the recession: men in low- to medium-skilled construction or manufacturing jobs. If they are out of work for two years, they may never find their way back into the workforce at all.

This in turn leads to yet another problem. The situation moves from a “cyclical unemployment” problem (solved easily when the economy rebounds) to what economists call a “structural unemployment” problem. This one is much harder to solve. Even when the economy rebounds, there may be a mismatch between the HELP WANTED ads and the availability of skilled workers. The structure of the economy has moved on, and massive numbers of workers are left behind with skills that are no longer relevant.

The International Monetary Fund has determined that the “structural” or “natural” rate of unemployment in the US has risen from about 5% before the Great Recession to 6.75% now. That implies that even if America’s economy rallies in the next year or so, and jobs are created each month at a rate that keeps up with population growth, the best they may be able to do is get the unemployment rate down to 6% or 7%. Swaths of potential workers will remain out of work—some permanently.

It all starts to sound quite ominous. It’s easy to suggest that Washington and the state governments should put more emphasis on skills and job retraining, and they probably should. Yet as everyone knows, retraining is an uphill battle, particularly for workers later in their careers or ones who aren’t interested in being re-trained.

In the meantime, Americans will struggle. It may be years until a strong job market returns. Workers will learn to be more flexible and adaptable in their career choices. Obama will put the best spin on the numbers as he can. And the markets will try to celebrate with every tiny crumb of good news that comes their way.