May 11, 2011
According to the latest employment report, there were 268,000 private sector jobs created in April. This job creation number has been widely hailed as evidence of progress in labor markets, and it’s certainly true that the report could have been much worse. But this is nowhere near the robust job growth we’ve seen in recoveries from previous recessions, and there are worrisome signs that the troubles for labor markets are far from over. For example, a key measure of labor market health, the employment ratio, fell from 63 percent to 58.5 percent during the recession and it has been stuck near 58.5 percent for more than a year and a half. In addition, there is no sign of wage pressures as would be evident in a tightening labor market, long-term unemployment remains at record levels, and the unemployment rate actually went up to 9.0 percent instead of going down as expected.
Some analysts are counseling patience. They argue that job growth near turning points is always low, and we can expect accelerating job creation in the near future.
Perhaps we are on the cusp of accelerating employment growth, but next month will mark two years since the end of the recession. Thus, there’s been plenty of time for this acceleration to have happened already, yet job growth remains sluggish. For this reason I don’t think we can assume that accelerating job growth is just around the corner, and at present rates of job creation we are looking at five years or more until we reach full employment. That is far too long for those who need jobs today.
When unemployment is persistently high, permanent drop-outs from the labor force increase, more people settle for jobs below their capability, get stuck there, and end up permanently underemployed, and lifetime income is, on average, lower. These effects are particularly large for teens, but older workers can also find it difficult to find new employment after losing a job. Many settle for jobs far below their ability, or find a way to hang on until they are eligible for retirement benefits by living with family, doing odd jobs here and there, going on disability, or doing whatever it takes to survive until retirement benefits kick in.
Thus high unemployment, particularly high long-term unemployment, is very costly. We currently have a jobs deficit of around 11 million. A long-term increase in unemployment of, say, 1 percent – that’s a change of around 1.5 million workers – cannot be ruled out by any means.
How costly would this be in terms of lost GDP? The exact relationship between long-run economic growth and long-run unemployment is not known precisely, but to get a sense of the numbers involved, suppose that GDP grows at 2.5 percent instead of 3.0 percent as a result of higher long-term unemployment. Using the present level of GDP as a starting point, the cumulative change in GDP after 25 years is a loss of $33.7 trillion – that’s more than double today’s GDP of $14.7 trillion – and a loss of $224.5 trillion over 50 years. If we start from a lower growth rate, 2.75 percent instead of 3 percent, and assume a smaller decline in the growth rate due to long-term unemployment, a decline of 0.25 percent instead of 0.50 percent (i.e. a change from 2.75 percent to 2.5 percent) — both of which make the loss smaller — there is still a cumulative GDP loss of $16.5 trillion over 25 years and $107.4 trillion over 50 years (at 75 years, the horizon used to evaluate Social Security, the cumulative difference is $394.6 trillion for the 0.25 percent difference in growth and an incredible $846.5 trillion with the 0.5 percent difference).
The point is that at these horizons, which are typical in discussions of our long-run debt problem, small changes in growth from higher employment can cause large cumulative changes in output. With relatively modest tax rates, changes in GDP of this magnitude make a huge, huge difference to our budget outlook, and the figures don’t even include the substantial saving from having more people working instead of using social services or claiming disability. Thus, one of the best ways of solving our budget problem is very simple, having a greater percentage of our population working instead of drawing social service benefits, and there are things we can do in both the short-run and long-run to promote job growth.
In the short run, an important objective of policy is to keep people connected to the labor force. Those who lose such connections are much more likely to drop out altogether, use more social services, and lower the long-run economic growth rate. There are many, many things we can do to stimulate employment – jobs programs, federal subsidies to help with the wage cost of state and local infrastructure projects, tax breaks for hiring in the private sector, and so on. If we want to provide workers with the means of supporting themselves and their families, stabilize the economy, and avoid losing workers to the suboptimal outcomes that permanently lower economic growth, we need to do much more than we are doing to promote job creation.
In the longer run, there is much to do as well. We need to improve education, make productivity enhancing investments in infrastructure, foster the innovative activity that produces good jobs, improve social safety nets, particularly services that help the unemployed find decent jobs, and do everything we can to ensure that our valuable labor resources are used as productively and effectively as possible.
Despite recent signs showing some improvement in the labor market, we still have an unemployment crisis that demands immediate attention. If we wait to address the unemployment crisis, or hope it will somehow fix itself, we will be negligent in our duty to give people the best possible chance of reaching their full potential, and we risk losing ground in the global race for economic prominence.
The New Normal: High Unemployment to Last for Years (TFT)
States Borrow Heavily to Meet Huge Demand for Unemployment Benefits (TFT)
Big Payroll Gains but Still High Unemployment (TFT)