April 11 (Bloomberg) -- The sharpest drop in unemployment in more than a quarter century obscures a simple fact: The jobs market still isn’t working for many Americans.
Some 6.3 million people have been out of work and looking for a job for more than six months. The employment-to-population ratio is lower than it was when the recession ended as companies have been slow to add to payrolls. And big sources of hiring in the past -- government, health care and retailing -- may not be able to reprise that role in the future as lawmakers limit outlays and consumers curb spending.
“The trends are a little bit scary,” said Nobel laureate Michael Spence, a professor at New York University. “There’s been a break in an important part of the social contract” for many Americans who are finding they can’t get ahead.
Mixed messages from the jobs numbers make decisions more difficult for Federal Reserve Chairman Ben S. Bernanke and his central bank colleagues as they wrestle over monetary policy.
Rising prices and falling unemployment -- the jobless rate dropped to 8.8 percent in March from 9.8 percent in November, the biggest four-month decline since 1983 -- suggest that the Fed should raise rates from near zero later this year to keep inflation in check, according to Joseph LaVorgna, chief U.S. economist for Deutsche Bank Securities in New York.
He sees yields on Treasury securities rising, with the two-year note hitting 1.25 percent to 1.5 percent and the 10-year-note climbing to 4 percent by the end of the year. They were 0.81 percent and 3.58 percent at 5:16 p.m. April 8 in New York, according to Bloomberg Bond Trader prices.
Alan Krueger, a former Treasury official, argues that policy makers shouldn’t be tightening monetary policy in the face of depressed employment and elevated long-term joblessness.
“I would like to see QE 2.5,” with the Fed completing its second round of quantitative easing in June and then buying more Treasury securities thereafter, said Krueger, who is now a professor of economics at Princeton University in New Jersey.
That’s not likely to happen, said Roberto Perli, a former Fed official who is managing director of International Strategy & Investment in Washington. The threshold for additional purchases beyond the $600 billion in QE2 is “very high at this point,” he said. The debate at the Fed instead focuses on how fast to remove the record stimulus the central bank has pumped into the economy.
Fed policy makers agreed at their last meeting that “gains in employment seemed to be on a gradually rising trajectory,” though there was still substantial slack in the labor market, according to the minutes of their March 15 gathering.
For Dan LaRue, a 60-year-old former marketing specialist for JPMorgan Chase & Co., there’s scant sign that the jobs market is getting better.
“The reality of what I’m seeing and what my fellow unemployed coworkers are seeing doesn’t jibe” with reports of an improving labor market, said LaRue, who’s been without a full-time job for more than two years. “It’s kind of ugly out there.”
The New York City resident said he’s borrowing money from his 81-year-old mother to help make ends meet. “I hate it, but thank God she’s there,” he said. “I’m willing to take a pay cut, but I don’t think I’m even being considered.”
The ratio of people employed to the population stood at 58.5 percent in March, down 0.8 percentage point from July 2009 when the recovery began and up just 0.3 point from a 27-year low of 58.2 percent in November 2010, according to data from the Labor Department.
The ratio is a better measure of the jobs market because, unlike the unemployment rate, it isn’t affected by changes in the size of the labor force, said Edward Leamer, a professor of management, economics and statistics at the University of California at Los Angeles.
About half of the fall in the jobless rate during the last four months was caused by Americans who gave up looking for work and left the labor force -- a development that he said isn’t something to welcome. “It’s people getting so discouraged that they’re dropping out,” said Leamer, who is also director of UCLA Anderson Forecast.
That number may grow later this year as extended government unemployment benefits run out, Krueger added. To collect those benefits, the jobless must show that they are searching for work, and the longer people are without a job, the less time they spend looking, according to a study of 6,025 unemployed that Krueger conducted with Andreas Mueller of Stockholm University in 2009 and 2010.
Some 45.5 percent of those classified by the Labor Department as jobless in March had been without work for more than six months, just off the record high of 45.6 percent set in May last year.
The waning intensity of their searches suggests that they may not be putting as much downward pressures on wages -- and inflation -- as some macroeconomic models assume, said James Stock, a professor of economics at Harvard University in Cambridge, Massachusetts.
That doesn’t mean the Fed should start worrying about accelerating prices, according to Stock. “We still have a very weak economy,” he said. “Disinflation strikes me as a much greater risk than inflation at the moment.”
Gwen Robbins, a 61-year-old resident of Savannah, Georgia, is a self-styled 99er, so called because her 99 weeks of employment benefits ran out in January. Robbins, an office manager until December 2008, said she’s “applied for probably close to 400 jobs” since then.
“I’m giving up on the private sector,” said Robbins, when asked if she’s continuing her search. Many companies seem more interested in hiring younger applicants, she said, adding that she now is seeking public-sector work with the city.
The jobs-market recovery remains “lackluster,” the International Monetary Fund said in its World Economic Outlook report. The Washington-based lender forecasts that U.S. unemployment will average 8.5 percent this year and 7.8 percent in 2012.
The flaws in the labor market were aggravated by the recent recession but didn’t start there, according to Krueger. The employment-to-population ratio in the last expansion, which began in 2002, never reached the 64.7 percent peak it attained in 2000 during the previous upturn.
Rising income inequality and sluggish wage growth during the last expansion also suggest that the labor market’s troubles are ingrained, Spence said. Average hourly earnings showed little growth from 2002 to 2007 when adjusted for inflation.
Machines Replacing People
Economists posit a variety of reasons for the dysfunction. Spence attributes it partly to globalization, as China and other emerging markets take work Americans once did. Leamer points to technology, with machines replacing people in the production process. For Krueger, some of the fault lies with the U.S. education system and training programs for not providing employees with the skills they need.
The challenges facing the U.S. involve both the quality and quantity of jobs created, Spence said. A study he did with New York University researcher Sandile Hlatshwayo showed that virtually all of the growth in employment between 1990 and 2008 was in the nontradable sector of the economy, which isn’t subject to international competition. Government and health care together accounted for almost 40 percent of the jobs added.
Employment growth in that sector is likely to slow as government spending is restrained, the authors argue in a paper for the Council on Foreign Relations in New York. Value added per person grew 0.7 percent a year in the period studied, which explains why wage gains for these types of jobs were limited, they say.
Value-added in the tradable arena, which includes manufacturing and financial services, grew by an average 2.3 percent a year, allowing these employees to enjoy bigger compensation increases. The sector as a whole added few net jobs, though, as manufacturers in particular moved production overseas, Spence and Hlatshwayo wrote.
The result, according to the paper: growing income inequality as many of the jobs the U.S. created were low-paying ones that added limited value.
“The American dream is being seriously tested right now,” Leamer said. “It’s an emergency for the middle class.”
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