The Slow Road to Jobs
In recent recessions, employment has taken longer and longer to return. Why
this lag may be the longest
By Jane Sasseen
Could it take as long as five years for the economy to replace all of the 8
million jobs lost since the Great Recession began? The most bearish economists
think so.
Job creation is proving to be painfully slow, and Washington is starting to
panic. With unemployment at a 26-year high of 10.2% and climbing, the Democrats
are scrambling to rev up the economy before the midterm elections next November.
The latest effort is a "Jobs Summit" set for Dec. 3 at the White House. The
idea, said President Barack Obama after a Nov. 23 cabinet meeting, is that the
gathering of business leaders, nonprofits, academics, and labor will "explore
how we can jump-start the hiring that typically lags behind economic growth."
That may well prove an impossible goal since the White House is battling an
ominous economic trend that has been gathering in strength and severity for
decades. The U.S. economy, once the greatest job-creation machine in the world,
has taken longer and longer to replace the jobs lost in recent recessions—never
mind creating the additional jobs needed to absorb new workers into the market.
Back in the '70s and '80s, it took as little as a year after a recession ended
to add back the jobs that had disappeared. Yet after the eight-month downturn
that ended in March 1991, it took 23 months. And following the 2001 dot-com
bust, 39 months passed before the U.S. returned to square one on the jobs front.
This time, things could be even worse. U.S. payrolls peaked at 138 million in
December 2007; today they stand at roughly 130 million. Stuart G. Hoffman, the
chief economist of the PNC Financial Services Group thinks it could easily take
another four years to regenerate all those jobs, assuming, as many economists
do, that the recession ended in June of this year. David Rosenberg, the former
top North American economist for Merrill Lynch, now with the Canadian investment
firm Gluskin Sheff + Associates, is even more pessimistic. Convinced that the
U.S. has now entered "the mother of all jobless recoveries," he believes it will
take at least five years to recover all those jobs. "And that's a conservative
estimate," he adds.
What accounts for the growing lag times? The speed and extent to which GDP
bounces back after a downturn is one crucial factor. Martin A. Regalia, chief
economist for the U.S. Chamber of Commerce, points out that as the U.S.
recovered from earlier recessions, GDP often grew for several quarters at around
7%—roughly four points above the economy's long-term potential. Such spurts,
fueled by strong pent-up demand among consumers and businesses, helped many
unemployed Americans find jobs. Not this time: With both households and
businesses stepping back from spending levels that were artificially pumped up
by debt, demand is weak. Most economists project GDP growth to stay at or below
3% for the next to years. "If you don't have growth well above your long-term
potential, you can't reabsorb people, so it takes a lot longer to get back to
where you were," says Regalia.
It's not just a matter of regaining lost ground: There are also all those
young people just entering the labor force to put to work. Simply to keep the
jobless rate from rising, the U.S. needs to add a net 150,000 jobs a month.
While the slashing of U.S payrolls appears to be slowing, no one expects the
economy to generate anywhere near the growth needed to generate that many new
jobs anytime soon. That's why Harvard University economist Kenneth Rogoff
believes the unemployment rate could peak at over 11%. "The U.S. would need to
add a good 11 million jobs to bring the unemployment rate back to where it was
at the start of the crisis, and over 9 million jobs just to get unemployment
back to 6%," he says. As for the unemployment rates of 5% or lower that the U.S.
boasted between 2005 and 2007? "We might not see that for a decade," says
Rogoff.
Slower growth only partly explains the shift toward jobless recoveries.
Goldman Sachs (GS)
senior economist Ed McKelvey argues that over the last decade globalization and
deregulation have forced companies to focus far more on controlling costs to
remain competitive in world markets. Sharply higher productivity is allowing
companies to get far more out of the workers they have, while factory automation
is wiping out assembly line work and information technology is making many
white- and pink-collar jobs extraneous. Meanwhile, companies are moving other
operations abroad to take advantage of cheap labor in places like China and
India. Such pressures from globalization are only increasing. "With most of the
motivations and mechanisms for the jobless recovery still in place, we see no
reason why most firms would behave differently this time around," McKelvey wrote
in a recent note to clients.
In theory, American workers should be able to shift gears and perform
higher-value-added work at home, and some have. But many Americans aren't
equipped for the jobs of the future. A telling sign of the mismatch between
workers' skills and employers' needs is that according to the U.S. Bureau of
Labor Statistics, there were almost 2.5 million job openings in September that
employers were actively trying to fill. While that was down from a peak of 4.8
million in 2007, it was still a stunningly high number considering that there
were over 15 million people unemployed that month. Julian L. Alssid, executive
director of the Workforce Strategy Center, says that schools, including many
community colleges, still aren't producing graduates with the kinds of skills
that employers demand.
The weak labor market has left many workers far more idle than they'd like.
That means companies have plenty of room to boost hours for part-timers before
they need to add more people to the payroll. In a Nov. 16 speech, Federal
Reserve Chairman Ben S. Bernanke pointed out that the number of part-time
workers who want a full-time job but cannot get one has more than doubled since
the recession began. The average workweek for production and nonsupervisory
employees has fallen to 33 hours, the lowest level of the postwar period. "The
best thing we can say about the labor market right now is that it may be getting
worse more slowly," Bernanke added.
Which leads to another key reason why unemployment is likely to rise even as
layoffs fade from the picture: New hiring will probably remain sluggish. That
may seem an obvious point, but Michael Feroli, an economist with JPMorgan Chase,
(JPM)
points out that the recent jobless recoveries didn't occur because layoffs
continued longer than during a traditional recession. A far more critical factor
was that businesses waited longer to start hiring again than had historically
been the case.
It all adds up to an enormous economic and political challenge for President
Obama and his advisers—and one for which they have only limited ammunition.
Count on the President to keep reminding everyone how much worse things would
have been without the stimulus and the bailout of the banks. While there's talk
of boosting infrastructure spending and offering tax credits to employers who
create new jobs, the soaring deficit is likely to prevent ambitious new programs
from being adopted. "There aren't a lot of easy options," warns Gregory
Valliere, chief policy strategist for institutional broker Soleil Securities.
"Those that make the most sense will cost a lot of money, which voters have
adamantly rejected. So it's hard to see what they can get done." The real
question may be whether the summit gives the Administration and its
congressional allies some political breathing room.
With Peter Coy
Sasseen is
Washington bureau chief for BusinessWeek.