An August 7 New York Times article, Jobless and Staying that Way observed that the current period of high US unemployment - 9.5% percent as of July 2010, more than twice the unemployment rate around the same time three years ago - is the longest since the Great Depression: “Nearly half the 14.6 million unemployed have been out of work for more than six months, a level not seen since the Depression.”
In the past sixty years, we have had a number of ups and downs in the economy. While unemployment goes up during the down periods, it does not last long. Within a relatively short time the economy improves and unemployment rates start to go down once more, usually to a rate below 5%. As a result, the American safety net has been built on the assumption that unemployment would be short term, unlike the more generous safety nets in most European countries, where unemployment is generally higher.
But our current downturn might be fundamentally different from the recessions of recent decades. In addition to an economic downturn, we may be experiencing a fundamental reshaping of the economy, driven, at least in part, by advances in information technologies, which have led to a resurgence in US labor productivity as well as an increasingly integrated global economy.
“Americans have almost always taken growth for granted. Recessions kick in, financial crises erupt, yet these events have generally been thought of as the exception, a temporary departure from an otherwise steady upward progression. But as expectations for the recovery diminish daily and joblessness shows no sign of easing . . . a different view is taking hold. And with it, come implications for policymaking.”
“The new normal, as it has come to be called on Wall Street, academia and CNBC, envisions an economy in which growth is too slow to bring down the unemployment rate, while the government is forced to intervene ever more forcefully in a struggling private sector . . . The new normal challenges the optimism that’s been at the root of American success for decades, if not centuries.”
The dire consequences of such a new normal were painfully described in an excellent, if depressing article in The Atlantic earlier this year, “How a New Jobless Era Will Transform America” by deputy managing editor Don Peck. He writes:
“The Great Recession may be over, but this era of high joblessness is probably just beginning. Before it ends, it will likely change the life course and character of a generation of young adults. It will leave an indelible imprint on many blue-collar men. It could cripple marriage as an institution in many communities. It may already be plunging many inner cities into a despair not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years to come.”
He believes that the unemployment figures we have all been following understate the magnitude of the jobs crisis.
“The broadest measure of unemployment and underemployment (which includes people who want to work but have stopped actively searching for a job, along with those who want full-time jobs but can find only part-time work) reached 17.4 percent in October, which appears to be the highest figure since the 1930s. And for large swaths of society - young adults, men, minorities - that figure was much higher (among teenagers, for instance, even the narrowest measure of unemployment stood at roughly 27 percent). One recent survey showed that 44 percent of families had experienced a job loss, a reduction in hours, or a pay cut in the past year.”
Peck then proceeds to explain the sad consequences of any kind of new order based on pervasive joblessness
“There is unemployment, a brief and relatively routine transitional state that results from the rise and fall of companies in any economy, and there is unemployment - chronic, all-consuming. The former is a necessary lubricant in any engine of economic growth. The latter is a pestilence that slowly eats away at people, families, and, if it spreads widely enough, the fabric of society. Indeed, history suggests that it is perhaps society’s most noxious ill.”
“The worst effect of pervasive joblessness - on family, politics, society - take time to incubate, and they show themselves only slowly. But ultimately, they leave deep marks that endure long after boom times have returned. Some of these marks are just now becoming visible, and even if the economy magically and fully recovers tomorrow, new ones will continue to appear. The longer our economic slump lasts, the deeper they’ll be.”
According to Peck, the consequences of prolonged unemployment are not only bleak but truly systemic in nature - “a slow-motion social catastrophe.” Joblessness is more devastating to families and communities than poverty. Many of the social ills in inner cities can be attributed to their loss of jobs in the 1970s. Such a dimension of human suffering cannot be swept under the rug as externalities in abstract economic models. To better appreciate our complex societal ecosystems, we need models that not only capture the positive impact of productivity and growth on the economy, but also the negative impacts and true costs, of prolonged unemployment.
Nobody knows for sure how the economy will play out over the next few years. Some experts believe that the economy is improving, albeit slower than expected, and lower unemployment will soon follow. But if, as a number of other experts believe, our unemployment numbers will not decline all that much over the next 3 to 5 years, we need to do a lot more. Returning to a normal job environment must become one of our top national priorities, trumping the political and ideological battles that have raged over the past two years.
These problems are very complex, as is evident in the wide differences in opinion as to their causes and potential solutions. Job creation has to therefore become one of our top innovation priorities. We must bring together the best minds in business, government and academia to help us come up with creative new ideas.
We are living in a time of great innovations, as we are leveraging our sophisticated, new technologies to develop new products and services, transform just about every industry and achieve major productivity growth in the economy. We need to focus at least a portion of our innovation efforts to explore how these same great new technologies can be used to help us create new jobs, both in the short and long terms.
For example, we should explore how to better leverage social networks and collaborative platforms for training and education, to help teach new skills to job seekers that better match current business requirements. In an OpEd in the August 29 NY Times, economist Laura Tyson highlighted the close connection between jobs and education in today’s economy:
“Although the jobs crisis is primarily a crisis of demand, it also reflects a mismatch between the education of the work force and the education required for jobs in today’s economy. Consider how the unemployment rate varies by education level: it’s more than 14 percent for those without a high school degree, under 10 percent for those with one, only about 5 percent for those with a college degree and even lower for those with advanced degrees. The supply of college graduates is not keeping pace with demand. Therefore, more investment in education could reduce both the cyclical unemployment rate, as more Americans stay in school, and the structural unemployment rate, as they graduate into the job market.”
We can also learn from others, by seriously studying how practices that work in other countries could be translated and applied to the US economy, such as the government programs to promote short-time work rather than lay-offs in Germany, where the employment picture has significantly improved over the past year. We should develop sophisticated economic models to help us better understand if such practices could be adapted in the US economy.
What is clear is that we cannot just stand by and risk the consequences of any kind of new normal based on prolonged high unemployment, and its potential impact on the social fabric of the country. It is hard to think of a more urgent national challenge than to get this right.