Thursday, October 22, 2009

The Unemployment Problem - Part 1

Last week’s post identified “continued high unemployment” as a hindrance to future economic recovery. Unemployment is in the news every day and economists are predicting that it will take longer for the jobless rate to fall after this recession. What makes this time different?

In previous recessions (we will ignore the one in 2001 for now) an economic downturn would send many factory workers out of the workforce as demand for products dropped. There would be some reduction in white-collar workers at firms with weak balance sheets or those that went bankrupt due to the bad economic conditions. When demand improved, the blue collar workers returned to their factory jobs and the white-collar workers found new jobs at companies in growing industries or new start ups. The pain for most people was short-term and 26-39 weeks of unemployment insurance usually provided an adequate safety net.

This time is very different. Blue-collar workers are getting hit as usual, but skilled, degreed, white-collar workers have been cut in record numbers. The 2001 recession was a preview of this as the workforce was much less manufacturing based than the 1990’s. But with the economy continuing to be much less manufacturing based and this recession being about four times as severe, the impact on the white collar work force is intensified.

Here are the stone cold numbers. There have been almost 8 million total jobs lost since December 2007. There are over 15 million people unemployed. There were only 2.4 million jobs openings in August (this is 1.8% of the total number of jobs, an all-time low). This means there are roughly six unemployed people for every job opening. It is taking on average six months for people to find work, but 5.4 million people (36% of total unemployed) have been unemployed more than six months.

The forecasts are for the unemployment rate to peak at 10-11% sometime between February and May of 2010. Please be aware the unemployment rate can give “false readings” at the bottom of the employment cycle. The unemployment rate is calculated from a monthly census bureau survey that determines if people have jobs or are looking for work. People who are unemployed, but have given up looking for work are not counted as unemployed. Therefore the job situation could be getting worse, but the unemployment rate could actually decrease in a given month.

The unemployment rate is calculated as follows:

(Total people unemployed and looking for work / (Total people employed + total people looking for work).

Conversely when job growth begins, the unemployment rate can actually increase as many people who had previously stopped looking start searching again (they are now counted again as unemployed). So you may soon hear the confusing news reports that 200,000 new jobs were created last month and unemployment went up .2%.

The forecasts for when unemployment will fall to traditional levels range from 2014 to 2017. Why will it take so long this time? Many of the blue-collar jobs have been lost for good. Manufacturing plants and warehouses continue to be closed and consolidated. There are also structural issues with white-collar job growth. Many of these jobs were created in the economic growth cycle that started in the 1990’s. The jobs were needed to create structures and systems that facilitated corporate growth. However now that the infrastructures are in place, it takes fewer workers to actually maintain them. Dr. Dave Altig (Macroblog) reports the percentage of employee separations labeled as permanent is at 65%, an all-time high.

This is why it will take longer for job growth to return during this recession. This recession is more severe and there are structural changes going on in the economy that will restrict the traditional rate of job growth in the economic recovery.

It is strange for the stock market to rally when unemployment is high and increasing. But companies have cut expenses so much that they are making profits on much fewer sales. Of course the biggest reduction in cost has been workers. So this is just a short-term solution to the problem. In the long run, companies need new customers, generating increased sales, to grow. However, many of these potential new customers don’t have jobs. You can’t win at this game forever.

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