The Risk Factor
Sleepwalking through America’s Unemployment Crisis
Mohamed A. El-Erian
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NEWPORT BEACH – It was relegated to the Q&A session, rather than featured prominently in the opening statement, at last week’s first-ever press conference of US Federal Reserve Board Chairman Ben Bernanke. It is an issue that too many in Washington, DC are willing to dismiss as “transitory,” despite visible evidence to the contrary. It is extremely vulnerable to high oil and food prices. And it undermines the operational assumptions that underpin the long-standing characterization of the US economy as vibrant and responsive.
The issue is the scope and composition of unemployment in America – a problem that is yet to be sufficiently recognized for its increasingly detrimental impact on the country’s social fabric, its economic potential, and its already-fragile fiscal position and debt dynamics.
Let us start with the facts:
· At 8.8% almost three years after the onset of the global financial crisis, America’s unemployment rate remains stubbornly (and unusually) high;
· Rather than reflecting job creation, much of the improvement in recent months (from 9.8% in November last year) is due to workers exiting the labor force, thus driving workforce participation to a multi-year low of 64.2%;
· If part-time workers eager to work full time are included, almost one in six workers in America are either under- or unemployed;
· More than six million workers have been unemployed for more than six months, and four million for over a year;
· Unemployment among 16-19 year olds is at a staggering 24%;
· With virtually no earned income and dwindling savings, the unemployed are least able to manage the current surge in gasoline and food prices, they are effectively shut off from credit, and many have mortgage debt that exceed the value of their homes.
These and many other facts speak to an unpleasant and unusual reality for the United States. The country now has an unemployment problem that is large in magnitude and increasingly structural in nature. The consequences are multifaceted, involving immediate personal anguish, rising social and political tensions, economic losses, and budgetary pressures.
This is much more than a problem for the here and now. High and intractable unemployment has serious negative long-term consequences that threaten to become exponentially worse. This is a crisis.
Substantial international research shows that the longer one is unemployed, the harder it is to get a job. This erodes an economy’s skills base and saps its long-term productive capacities. And, if unemployment is particularly acute among the young, as is the case today, too many of the unemployed risk becoming unemployable.
Undoubtedly, the Great Recession triggered by the global financial crisis has contributed to this worrisome situation. Unfortunately, the problem is much deeper, as it was long in the making.
At its root, America’s jobs crisis is the result of many years of under-investment in human resources and the social sectors. The education system has lagged the progress made in other countries. Job retraining initiatives have been woefully inadequate. Labor mobility has been declining. And insufficient attention has been devoted to maintaining an adequate social safety net.
These realities were masked by the craziness that characterized America’s pre-2008 “Golden Age” of leverage, credit, and debt entitlement, which fueled a gigantic but unsustainable boom in construction, housing, leisure, and retail. The resulting job creation, though temporary, lulled policymakers into complacency about what was really going on in the labor market. As the boom turned into a prolonged bust, the longer-term inadequacies of the job situation have become visible to all who care to look; and they are alarming.
Left to its own devices, America’s unemployment problem will deepen. This will widen the already-large gap between the country’s haves and have-nots. It will undermine labor’s skills and productivity. It will accentuate the burden imposed on the gradually declining number of people who remain in the labor force and have jobs. And it will make it even harder to find a medium-term solution to America’s worsening public-debt and deficit dynamics.
The US government has little time to waste if it is to avoid an even more protracted and entrenched unemployment problem. It must move now to address the problem’s sources through multi-year programs that range from educational restructuring and worker retraining to productivity enhancement and housing-sector reform. And it must do so while better protecting the long-term unemployed, many of whom bear little responsibility for their current, once unthinkable, and unfortunately long-lasting predicament.
It is past time for the US to wake up and confront in a holistic fashion its unemployment crisis. As everyone who has ever had an unpalatable job knows, shutting off the alarm and pulling the blanket over one’s head is not a solution.
Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of When Markets Collide.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
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RalphMus 09:49 02 May 11
The idea that unemployment involves loss of skills, which in turn leads to difficulty in finding a job, doubt less has great appeal for those who cannot be bothered looking at the evidence. The evidence here is actually mixed, to put it mildly. Two studies which poor cold water on the idea as follows.
http://openlibrary.org/books/OL12075622M/The_L-U_Curve_%28Occasional_Papers%29
http://ideas.repec.org/a/taf/applec/v31y1999i10p1207-18.html
Second, I doubt that the range of skills required in the US just before the recession is much different to that required (at full employment) now. As to construction workers, the evidence is that they find no more difficulty getting jobs than anyone else. Wait twenty years, and range of skills required will change substantially. But three years? Come off it!
Third, it should be possible in a properly functioning labour market to achieve full employment regardless of the range of skills. For example even if half the population was illiterate and innumerate, it should still be possible to arrange very simple jobs. Most of the population of Europe was illiterate in the Middle Ages, but a large majority nevertheless found work.
And before some bore points out that illiteracy is not desirable, I should point out that I am not saying it is. I am just making the cold / strictly logical point that lack of skills shouldn’t preclude employment in a properly functioning market.
PROCYON 02:06 02 May 11
We cannot also ignore the rapid fall in wages either as a consequence or as a reason why demand continues to wither in this environ of unemployment, while the polity is divided on the short term and the long term actions.
The output gap is staggering and the incentives in various forms continue to lag the real need, while corporate profits soar in a loose monetary environment. While any step towards tightening would bring parity to the incessant flow of capital towards assets that fuel the growth of bubbles, it would have its unintended consequences.
A very crucial juncture both for monetary policy, as for fiscal rectitude; either way the problems do not have a magic wand as a simple solution for employment generation.
Procyon Mukherjee
DFC 03:40 02 May 11
Unfortunatelly the problem of longterm unemployment is more than education and retraining, I think the globalization is the root cause of the structural problem of unemployment we sufer
Even if a multinational company can achieve the same, or even lower cost to produce the goods in USA than, lets say in China, this multinational company will produce in China, because they can use a lot of fiscal evasion methods to increase his profits. For example:
a) Re-invoicing
b) Transfer-pricing
c) Management of funds and investment through tax havens
etc...
The companies that produce inside USA cannot make such fiscal frauds and have to pay all the taxes, taxes that really sustain the social nets, and that is , together with the slavery wages, the driven force for globalization, and the reasons why more and more companies outsource their operations, destroying all the industrial base of our countries, and making unsustainable our societies
The only way out for the government to get resources is to increase the tax pressure and decrease the social benefits, so the incentives to the process explained before accelerates again
The welfare states is sustainable itself, with low level of unemployment, but maintaining the industrial base is required, and the only way is tackling the tax havens and reverting the kind of globalization we have now
mochaview 09:34 02 May 11
Excellent article. I have been unemployed for two years now and there is a stubborn perception that as soon as you are laid off you are thus unemployable. It is the most ridiculous mindset to confront in my job search. There is also the curse of dealing with bad credit once the unemployment insurance runs out, you are in deep financial trouble. When job offers are rescinded due to bad credit thanks to stubburn unemployment and no UE benefits what do you do? The managers who make the decisions to send jobs overseas, outsource or don't want to hire people with experience are the ones with the problem.
Very nice to speak in entirely academic terms but the housing crisis in terms of gentrifying out neighborhoods and creating little to no affordable housing for decent people with smaller paychecks is a problem. Why is it all the new apartments are for hipsters who can pay $3000/month for a hole in the wall and why does everyone else have to disappear to make that happen? We aren't going to simply die off and be out of their way. We're going to camp out wherever we can becuase after having no jobs, no income, eventually no home, we are going to be far too numerous to just push away. Remember, there are more of us than there are the privilged in the corporate offices where they exist in a bubble. We will be seen, heard and acknowledged.
neutrinoman 01:28 03 May 11
Right on. Bad government and Fed policies have responded to the last four decades of rising inequality with money printing and cheap credit. That era is now over, and we have to come to grips with the fact that it's a structural problem, not a cyclical one. Various "stimuli," monetary and fiscal, are a waste. They just stimulate speculation and pile up more debt.
Read Raghuram Rajan's Fault Lines -- great book.
Tyler 05:31 05 May 11
Mr. El-Erian,
Last month, you wrote of "the increasingly visible fiscal predicament in the US." This month, you write of "America's Unemployment Crisis." We can neither reduce the visibility of our so-called fiscal predicament nor end the actual unemployment crisis if we cut spending. Do you agree?
LittleBear 10:37 05 May 11
Sadly a supply side policy prescription. Let's include the demand for labor for a more complete analysis next time.
noam4prez 07:13 14 May 11
El-Erian does not mention outsourcing as a cause of unemployment that is "increasingly structural in nature".
With multinational corporations hiring as fast as possible in the BRICs and letting their US and Euro workforces attrit, capitalists are making a killing exploiting the third world's best and brightest, while kicking first-world workers into submission.
"Educational restructuring" and "worker retraining" are nothing more than rhetorical misdirection. A PhD in the US can be replaced by ten PhDs in India or China.
The current first-world unemployment situation is just a manifestation of the unending power struggle between capital and labor. Right now, capital is riding high. Eventually, the tables will turn.
tomori 02:14 19 May 11
Seems Pimco as well as many other investment solutions providers have to tread a fine line & just ignore the elephant in the room: labour cost in many countries outside the US is substantially lower for the same skill set. Given the easy transfer of work facilitated by globalisation & communications, business will always opt for the cheaper labour market - they have shareholders, profits & bonuses to maintain. No amount of 'multi-year programs that range from educational restructuring and worker retraining to productivity enhancement and housing-sector reform' can compete against cheaper labour costs.
PuWeiTa 06:10 31 May 11
If my kitchen catches fire it is a crisis, when my house burns down it is beyond crisis.
The high American unemployment results from the fact that corporate America can profit without hiring American workers. This will not change until the time when American workers will work for less or have better skills.
JPBulkoMBA 02:30 12 Jun 11
All is not well in these United States! With puny job creation and rising unemployment, the economy continues to sputter along attempting to recover from the devastating effects of the Great Recession.
Keep in mind that the economy needs to create more than 125,000 new jobs each month just to keep up with the nation's population growth. With only 54,000 new workers added in May, the economy left behind at least 71,000 new jobseekers.
The Great Recession vaporized more than eight million jobs, and those jobs cannot be replaced if the economy doesn't produce significantly more than 125,000 new jobs each month. Even with modest job growth of 200,000 jobs per month, many years would be needed to return the country to full employment.
In the mean time, many millions of otherwise hard-working American citizens struggle desperately to grasp at the last vestiges of the American Dream, watching helplessly as their standard of living disintegrates.
We need a better jobs creation solution!
To solve the unemployment problem, I've written a proposal that describes a mechanism through which we can fund a massive number of new business ventures by tapping the financial power of Wall Street to create jobs on Main Street. This approach ramps up employment quickly and puts money directly into the hands of the people who need it now: the consumers (whose spending represents 70 percent of GDP).
This enormous financial turbo-boost to the economy will reinvigorate economic activity and quickly return the eight million jobs lost during the Great Recession. The purpose of this mechanism is to take a private sector proactive approach to address the expected long-term high unemployment problem.
You can read the proposal here:
http://jpbulko.newsvine.com/_news/2011/04/20/6500827-a-modest-proposal-to-save-the-american-economy-entrepreneurial-blitzkrieg-as-job-creation-vehicle-
Joseph Patrick Bulko, MBA
vbierschwale 03:12 03 Jul 11
Subject: Let me show you exactly why the EURO is crashing and why austerity is NOT the solution.
You will need to read them in order to see the big picture.
Start with this first one that I titled "Let's put everybody in the European Union and the United States ouf of work by sending their job offshore and we will be Rich. Rich, I tell you...Rich" http://keepamericaatwork.com/?p=200297
The next one is this one titled "Why is China becoming the largest Economy and what can we do to prevent the World's economy from crashing?" http://keepamericaatwork.com/?p=200301
The next one is this one titled "My calculations show 191 million 696 thousand 293 jobs have been sent offshore" http://keepamericaatwork.com/?p=200310
The last one is this one titled "So you think it is impossible to have 191,696,293 jobs sent offshore from the European Union and the United States?" http://keepamericaatwork.com/?p=200312
rushtoqueue 03:18 02 May 11
Even medium-turn solutions wil be hard to attian with the US' two party system and four year terms. I no longer believe politicians have the peoples interest in mind.