By Clive Crook
Published: Last updated: May 23 2010 20:51
Unemployment in the US is high not just by its own past standards but by international standards, too, which is doubly strange. Figures also show a startling rise in long-term unemployment, to levels previously associated with Europe’s broken labour markets.
In April the number of Americans looking for work for more than six months rose to 6.7m, roughly half of all those unemployed. Such a high proportion is unprecedented: the long-term share has previously reached a quarter at most. Terms for the stickiness of high unemployment such as hysteresis and sclerosis have preoccupied students of Europe’s economies. They have not come up so much in discussions of US joblessness, but this may change.
Are these just signs that this recession has been exceptionally severe, or is something even worse going on? Can the US expect the rapid recovery in employment it has experienced coming out of previous recessions? On closer examination, US labour-market exceptionalism has not disappeared – but it is not what it used to be.
In a new study for the Brookings Institution, Michael Elsby and collaborators look at “The Labour Market in the Great Recession”. They confirm the deterioration of the US jobs market during this recession has been the worst for more than 60 years. In some ways, earlier patterns have been replicated, but scaled up. You can still see characteristic differences between the US and European labour markets. But these patterns have shifted recently, and not to the US’s advantage.
The US labour market (like the UK’s to a smaller extent) has always had high turnover. A lot of the labour force either quit or get laid-off each year, but these workers are rapidly rehired. Turnover in Europe is typically much slower, with higher unemployment on balance, especially of long duration. A secondary theme is that the reason that recessions raise joblessness in the US is usually more to do with a slow-down in hiring than any surge in lay-offs and people quitting.
This time, as in previous recessions, US unemployment inflows rose somewhat at the start of the recession – though with an unusually pronounced shift from people quitting to layoffs. More important, though, subsequent rates of hiring have not just declined, they have crashed. This is new. This is why long-term unemployment has soared, and why the US is looking more European – in a bad way.
Mr Elsby and his co-authors point out that, even with this dramatic slow-down in hiring compared with previous US recessions, unemployed Americans still find new jobs a lot faster than their counterparts in most of Europe. But the gap has narrowed – casting doubt on the rule that says, “the sharper the downturn, the faster the recovery”.
A key issue is indeed hysteresis: the likelihood that lengthening spells of unemployment become self-perpetuating, as skills erode or grow irrelevant. Adding to this danger of a growing long-term unemployment is the overhang of part-time workers, whose hours can be increased as an alternative to new hiring. The more limited use of temporary lay-offs – easily reversed in the upswing – will also depress job growth. And there may be a worsening mismatch between the workers available and the workers companies will need.
On that last crucial point, note the structural impact of the recession. It fell with sudden and exceptional force on particular industries, notably construction, which the bubble had inflated to unsustainable levels. Some of those jobs will never return. The house-price collapse has saddled millions with houses they cannot sell because of negative equity. This is bound to depress worker mobility. In the past, Americans have always moved eagerly from slow-growing to fast-growing regions.
The US is still a very long way from Europe in these respects, to be sure – but these are issues it never had to think about before. Another concern is that, too early in a still tentative recovery, politics has turned so severely against sustained fiscal expansion. At the same time, outright and seriously premature fiscal retrenchment is starting in Europe, diminishing demand for US exports. To cap it off, the dollar is climbing against the euro, tightening US monetary conditions.
Democrats have been pushing a new jobs bill to little or no avail, and the administration is on the defensive over public borrowing. The right combination in these circumstances is continued short-term fiscal stimulus plus a believable commitment to curb borrowing in the medium term. Politically, this is utterly beyond Washington, where one side is brainlessly content to oppose any and all “big government”, while the other, blithely dismissing justified public concerns about long-term borrowing, is nonetheless cowed into inaction.
Harvard’s Martin Feldstein has made an interesting proposal: rather than raising taxes on “the rich” in 2011, partially reversing the Bush tax cuts, retain them for two more years and then reverse them all, for rich and middle class alike. Combine that, I would say, with a generous new round of temporary support for the states – which are now sacking teachers, nurses, and policemen – and with other short-term job-support measures. Put a value added tax on the table, but for later. And cut long-term public spending by raising the retirement age.
None of it will happen. Not in time to help the new and persistently unemployed, anyway.
Copyright The Financial Times Limited 2010.
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