Some analysts are making the case that it’s time to look outside the U.S. at stocks in non-U.S...
Meet the Permanent Underclass
10/13/2011 12:30 pm EST
It looks like America will have to live with millions more unemployed, and adjusting for that without wrecking our economy or social programs will be quite a balancing act, writes MoneyShow.com editor-at-large Howard R. Gold.
Slowly, over the last year, it’s begun to dawn on us: The economic recovery isn’t really making a dent in unemployment.
The public knew this far earlier than economists or pundits did—and as for politicians, don’t ask!
Survey after survey showed Americans didn’t believe the economy was recovering. And online chatter has been downright hostile to any notion that either the markets or the economy were getting better.
But economists need hard data before changing their minds. And over the past few months, more and more of them have concluded that indeed, the depth of this particular recession and its roots in the financial crisis have combined with structural changes in the economy to push the so-called “natural” unemployment rate in the US permanently higher.
- Read Howard’s analysis “White-Collar Recession, Blue-Collar Depression” on MoneyShow.com.
If they’re right, it would be bad news for millions of Americans whose prospects are bleak enough already. It also would make the US economy more like the Europe we’ve routinely derided—without the social safety net European countries typically provide.
I hope I’m wrong and the fabled American ingenuity in which I strongly believe—and whose most shining star, the great Steve Jobs, left us last week—kicks in with new fervor.
But it looks increasingly like that will not be a panacea this time around.
Listen to Charles Plosser, president of the Federal Reserve Bank of Philadelphia, in a speech a couple of weeks ago.
“These numbers are troubling, especially when more than 40% of the unemployed, or some 6 million people, have been out of work for 27 weeks or longer,” he said.
“Millions of unemployed workers may take longer to find jobs because their skills have depreciated or they may need to seek employment in other sectors. These structural issues will take time to resolve. Jobs and workers will need to be reallocated across the economy, which is a long and slow process.”
Did you catch the word structural? It was no accident. And here’s Atlanta Fed president Dennis Lockhart in a September 27 speech.
“To me, it is not clear to what degree structural factors are impeding the filling of job vacancies,” he said.
“And… it is not clear to what extent the long-term unemployed are becoming a class of permanently unemployed, creating a problem resembling the so-called structural unemployment of some European countries.”
Again, notice the use of the word “structural”—twice. And note how Lockhart speculated about a “class of permanently unemployed” which he compared with “some European countries.”
When top officials start using language like that within days of each other, something’s up.
(Federal Reserve chairman Ben Bernanke doesn’t accept the structural-unemployment argument, although his recent statements have been quite glum about the economy, and particularly long-term unemployment.)
Long-term unemployment is critical here: As of September, 6 million of the 14 million unemployed were out of work for more than 26 weeks, and the average duration of unemployment was 41 weeks, according to the Bureau of Labor Statistics. That’s about double what it was following the recessions of the 1980s, 1990s, and early 2000s—and it’s the main reason economists are rewriting their playbooks.
They’re focusing on the “natural” unemployment rate—and forgive me for being a bit technical here, but I promise to keep it short.
NAIRU, the “non-accelerating inflation rate of unemployment,” is the official unemployment level below which economists expect inflation to rise. But it has become shorthand for the “natural” rate of unemployment or “full” employment when the economy recovers from its periodic recessions.
For years, economists have pegged NAIRU at 5%. The lowest official unemployment rate we’ve seen recently was 3.8% in 2000; it hit 4.4% in 2006 and 2007.
NEXT: How High Will Unemployment Stay?|pagebreak|
But those days are long gone: Economists now are starting to pencil in “natural” rates of unemployment closer to—are you sitting down?—7%. (The official unemployment rate is 9.1%.)
That means if every drop of cyclical unemployment is wrung from the system in a full recovery, the unemployment rate will still hover at 7%. So, three million more people likely won’t find a job even when the economy “recovers.”
Last month Goldman Sachs forecast that if current trends continue, “the structural unemployment rate rises from the current 5.75% to 6.5% in 2015 and 7.25% in 2020.”
Two economists at the San Francisco Fed estimated the natural rate was now 6.7%, adding that “significant labor market slack will persist for several years.”
And Nobel Prize-winning economist Edmund Phelps, who helped formulate the whole concept of the natural rate of unemployment, now thinks it’s around 7.5%.
Economists Marcello Estevao and Evridiki Tsounta of the International Monetary Fund recently found that after controlling for cyclical factors, the natural rate of unemployment is now probably 6.75%.
“A large part of the unemployment is cyclical. But there is something happening in this labor market,” Estevao told me in an interview.
A big part of that “something” is the intersection between a weak economy and a terrible housing market. “[People] just don’t move because there are no jobs” and because they can’t afford to take a loss on their homes, he explained.
For decades, Americans have boasted about the greater flexibility and mobility of our labor force, especially compared with that of Europe. “That’s not to be taken for granted” anymore, Estevao said.
We all know the reasons. Offshoring has decimated whole industries (like textiles, apparel, and furniture) and technological change has made entire job categories obsolete. Since the recession, companies have used technology to do more with less and have stockpiled cash rather than hire new people.
- Read Howard’s up-close take on what impact China will have on US workers at MoneyShow.com.
And employers are scrambling to get the right people for the jobs that are available.
“We cannot find qualified hourly production people, and for that matter many technical, engineering service technicians, and even welders, and it is hurting our manufacturing base in the United States," Douglas R. Oberhelman, chief executive officer of Caterpillar (CAT), said in a speech last month. CAT is actually expanding here as well as overseas.
"The education system in the United States basically has failed them and we have to retrain every person we hire." A recent study by the Brookings Institution bears him out.
Unfortunately, neither President Obama’s American Jobs Act, which is dying in Congress, nor the proposals put forth by GOP presidential candidates seriously address these issues. The president’s plan is a band-aid to keep unemployment from getting worse before the 2012 election, and the Republicans are proposing tax cuts of the kind that failed miserably to create jobs in the 2000s.
- Read the speech about jobs no politician would give at The Independent Agenda.
There are 14 million unemployed people in the US. 9.3 million more are “involuntary” part-time workers. And 2.5 million others were “marginally” attached to the labor force, having not technically looked for a job for four weeks, according to the BLS.
That’s nearly 26 million people, almost 17% of the labor force. It’s an “army of the unemployed” more than ten times the size of the US military and its reserves.
Right now they’re despondent. But if they ever got angry, they would make Occupy Wall Street look like Alice in Wonderland’s tea party.
Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. Follow him on Twitter @howardrgold, read more of his commentary at www.howardrgold.com, and check out his political blog at www.independentagenda.com.
Related Articles on MARKETS
I am going to do something a little different from my usual articles and start with my perspective o...
Stocks remain strong Friday after posting a fresh new record high, the first for the Dow (DJI) since...
Bill Baruch, president and founder of Blue Line Futures, previews E-mini S&P, Gold, Crude, and T...