In recent recessions, employment has taken longer and longer to return. Why this lag may be the longest
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