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26 Dec 2011
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The political gridlock has heightened uncertainty about the future prospects for the economy, which contributes to a lack of spending and investment, ultimately resulting in a poor record of job creation.

All recent major economic policy measures, whether initiated by Congress or the Executive, have generated enormous controversy, including Bush’s Troubled Asset Relief Program (TARP) in 2008, Obama’s Stimulus Package in 2009, and the largely unsuccessful, repeated efforts to reduce the budget deficit culminating in the bitter battle over raising the debt limit. The political gridlock has heightened uncertainty about the future prospects for the economy, which contributes to a lack of spending and investment, ultimately resulting in a poor record of job creation.

The U.S. unemployment rate was 4.4 per cent in mid-2007, just shy of its average of 4.9 percent over the previous decade. By October 2009, it had reached 10.1 per cent and, though it has declined somewhat, it remains stubbornly over 9 per cent (it stands currently at 9.1 per cent). The U.S. had experienced “jobless recoveries” after the 1990-91 and 2001 recessions, and unemployment had spiked to very high levels during some post-war recessions (up to 10.8 per cent in 1982), but it had not increased so quickly or stayed so high for so very long. What has caused this unemployment crisis and what are its implications?

The deepest fi nancial crisis the country has undergone since the 1930s has, of course, played a critical role. As economists Carmen Reinhart and Kenneth Rogoff argue in their book, This Time is Different: Eight Centuries of Financial Folly, the U.S fi nancial crisis followed the script of previous deep crises, involving a period of intense fi nancial deregulation, massive capital infl ows accompanied by deteriorating current account balances, a run-up in housing and equity prices, and the growth of public debt. This mix of unsustainable economic trends and risky fi nancial innovations (e.g. sub-prime mortgages and credit default swaps) is the proximate cause of the output contraction and sharply rising unemployment since 2007. The fi nancial crisis, however, cannot explain why the unemployment rate has not dropped signifi cantly after peaking in 2009.

Why then does the country seem to be unable to lower unemployment? One explanation is an unusual crisis of confidence among both consumers and investors. The Conference Board’s Consumer Confi dence Index (CCI) measures consumer optimism about the future state of the economy. The index plunged from a value of 112 in July 2007 to a low of 38.6 in December 2008. Although initially it recovered slightly, it soon declined again, reaching 44.5 by August 2011. This signals a strong and persistent crisis of confi dence by consumers that leads them to spend less, a crucial factor sustaining the lack of job creation. For their part, Wall Street and Main Street have been slow to renew investment spending in part due to a lack of confi dence. The banking industry has been cautious in its lending and holds $1.6 trillion in excess cash reserves deposited at the Federal Reserve Bank (obtained largely through the central bank’s two rounds of quantitative-easing policies). Companies also hold billions of dollars in accumulating working capital, indicating an unwillingness to engage in job creation until business conditions improve.

Of course, the severity of the fi nancial debacle itself may explain the confi dence crisis and the threat of a “double-dip recession.” The current European economic situation has added another major stumbling block on the way to recovery. Nonetheless, the deep and persistent decline in indicators such as the CCI hints that other factors are at play. One such factor may be the tense political climate that has characterised policymaking in the U.S. during and after the fi nancial crisis. All recent major economic policy measures, whether initiated by Congress or the Executive, have generated enormous controversy, including Bush’s Troubled Asset Relief Program (TARP) in 2008, Obama’s Stimulus Package in 2009, and the largely unsuccessful, repeated efforts to the u.S. unemployment crisis by Arvid Lukauskas and Francisco L. Rivera-Batiz Image: Truthout.org @ fl ickr.com · Oct–Dec 2011 · 23 Focus reduce the budget deficit culminating in the bitter battle over raising the debt limit. The political gridlock has heightened uncertainty about the future prospects for the economy, which contributes to a lack of spending and investment, ultimately resulting in a poor record of job creation.

Another major factor explaining the unemployment crisis is that the U.S. is suffering from structural forces that have been developing over many years but are now being made more transparent in the aftermath of the financial crisis. Structural unemployment refers to the existence of mismatches between labour demand and supply. Such mismatches can occur because of local labour shortages or because workers are unwilling to take vacant jobs due to their working conditions or low remuneration. They may also be due to an incompatibility between the skills the employer requires and those possessed by available workers.

Labour market mismatches are generally present when employers report difficulties in filling vacancies or unemployment rates vary widely among various categories of workers, whether by location, race/ethnicity, occupation, industry, or education level. In an extensive study of U.S. employers in the first quarter of 2011, the firm ManpowerGroup found that 52 per cent of those surveyed indicated experiencing difficulty filling job vacancies, up from 14 per cent during the same time period in 2010. The hardest jobs to fill involved highly skilled workers, including professional and technical workers, as well as low-skilled workers, including labourers in agriculture. This pattern, in which labour demand is strong for job seekers at the extremes of the educational distribution (very low and very high) and weak for those at the middle, is termed “polarisation of the labour market” and has been observed by several economists recently, including David Autor, Leonard Katz and Richard Murnane. Finally, the latest data reveals pronounced regional differences in unemployment, with some areas actually facing labour shortages. The states with the highest unemployment rates in September 2011 were Nevada (13.4 per cent), California (11.9 per cent) and Michigan (11.1 per cent); those with the lowest were North Dakota (3.5 per cent), Nebraska (4.2 per cent), and South Dakota (4.6 per cent).

The U.S. unemployment crisis has affected some groups more than others. The youth (16 to 24 years of age) unemployment rate was 18.1 per cent in July 2011, twice the rate for the overall population (and up from 10.6 per cent in 2007). Among African-American youth, the unemployment rate was 31 per cent in July 2011, three times the national average; for Hispanics, it was 20.1 per cent. The disproportionate unemployment burden suffered by youth is widely observed in other countries affected by the recession. In Spain and Ireland, the youth unemployment rate was 43.7 per cent and 27.9 per cent, respectively, in 2010, compared to 18.2 per cent and 8.9 per cent in 2007. This trend helps to explain the rise of popular protests spearheaded by youth movements from Wall Street to the Puerta del Sol in Madrid.

What can be done? The fact that the increase in unemployment is partly due to a macroeconomic shock means that aggregate demand policies, such as monetary and fiscal policies, should be part of the answer. Although President Obama recently proposed a jobs plan that relies on fiscal stimulus to spur employment, most of its provisions face fierce Republican opposition and have little chance of being enacted. In the face of strong criticism, the Federal Reserve is moving towards a third round of expansionary monetary policy in order to stimulate production, perhaps in an effort to compensate for the lack of fiscal stimulus. Nonetheless, insofar as the effectiveness of these policies depends on increased consumer and business confidence, they may have a limited short-run impact unless other fundamental problems, such as the political impasse in Washington and euro zone economic crisis, are resolved.

Policies that deal with the structural component of unemployment are also necessary. To resolve the crucial skills mismatch, a greater proportion of the population, especially among the youth, must increase its educational attainment and complete training in occupations that are in high demand. In the 1980s, the U.S. workforce had the highest educational attainment in the world, but a number of European and East Asian countries now surpass it. Moreover, the U.S. has had lower rates of enrolment in precisely those careers in high demand, pushing many firms – such as those in the IT sector — to fill their labour needs by employing foreign workers.

In addition to investments in higher education, alternative mechanisms of managing the transition from school to work are needed. Under the Clinton Administration, the U.S. implemented a wide range of policies stimulating linkages between educational institutions and both the public and private sectors. Through apprenticeships, career high schools, and technical community colleges, the goal was to reduce labour market mismatches by providing students with the skills sets demanded by employers. Many of these policies were abandoned despite having been proven successful.

In time the U.S. economy will grow again and the pick-up in economic activity will generate employment. The increase in demand for labour alone is unlikely to bring unemployment back down to previous levels, however. A portion of U.S. unemployment is due to structural factors and must be addressed through policies that correct labour market misalignments. Countries with educational systems that are integrated with the private sector, such as Germany, have had relatively low overall and youth unemployment rates, even during sharp economic downturns. In the past, government policies aimed at creating similar linkages in the U.S. also showed promise. Perhaps it is time to reinvest in them.


At Columbia University, Arvid Lukauskas () specialises in the political economy of finance and trade policy, while Francisco L. Rivera-Batiz () is Professor of Economics and Education at Teachers College, Columbia’s graduate school of education.

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