Adjusting to the 'New Normal': The Consequences of Long-term High UnemploymentPublished: December 08, 2010 in Knowledge@Wharton
2013. 2015. 2018.
What these years have in common is that all have been suggested by economists as possible dates when an economy limping into recovery will give way to a more robust job market and an unemployment rate that, while not as low as pre-recession levels, is expected to be significantly lower than the 9% and higher range the U.S. is currently experiencing.
What these dates also have in common, however, is that none will be here any time soon. The atmosphere of uncertainty, experts say, has potential long-term consequences for businesses and workers alike as they attempt to adjust to a "new normal." For employers who are reluctant to hire given the unknowns about taxes, consumer demand and health care costs, it means potentially losing out on a generation of talented employees who would otherwise have been hired. As a growing number of workers languish on the unemployment rolls for months or years, the danger is that they will become permanently jobless because they lack the skills to get hired once the jobs return.
"When Europe went through big recessions in the 1970s and 1980s, people who lost their jobs were often out of work for a year or more. Long spells of unemployment led to people losing hope and losing their connection to the labor market. When the growth returns, those people really aren't job-ready and so they're left out of the recovery," says Wharton business and public policy professor Justin Wolfers. "That historically has not been a problem in the U.S., where we have very short unemployment durations. If you are unemployed in this country, you have typically been unemployed for three months at a time. The problem now is that more than half the unemployed have been jobless for six months or longer."
Last week, hopes of a recovery were dealt a blow by the news that the U.S. economy added only 39,000 jobs in November. The unemployment rate jumped slightly to 9.8% (it had been expected to remain steady at 9.6% on the strength of 150,000 new jobs added). Indeed, much of the talk about the nation's employment outlook centers on numbers: When will the unemployment rate go down, and once it does, where will it plateau?
A certain amount of unemployment is expected as workers make natural shifts in their careers. At any given time, a number of factors figure into what rate constitutes "full employment," including demographic changes, industrial shifts and government tinkering. "The Fed has what they call a dual mandate and so they are responsible for both keeping prices stable ... and for keeping the economy at full employment or maximizing employment to the best of their ability," notes Mark Thoma, an economics professor at the University of Oregon. "To do that, you should raise interest rates or lower interest rates -- but you have to have some notion of what full unemployment is."
For example, Thoma suggests that some of the inflation woes of the 1970s came about when the Fed targeted a "full employment" rate that didn't account for natural job movement that came from baby boomers and greater numbers of women entering the workforce for the first time. "I think we're going to see a period of years when the natural rate of unemployment is going to be higher. If the Fed were to make the same mistake, that could create an inflation danger at some point. But I think they learned a lot from the 1970s experience and they are much less likely to make that mistake now. My worry is actually on the other side -- that they won't target a rate that is low enough."
Frictional, Structural or Cyclical?
In addition to natural, or frictional, unemployment, the rate is also governed by the cyclical nature of ups and downs in the economy and by structural changes that come when groups of workers or skillsets are rendered obsolete due to technological changes or the evolution of particular industries. Though most economists agree that the current level of unemployment is being fueled by the continued ripple effects of the recession, some also say there are structural forces at work, including the continued shift away from a manufacturing based economy and the bursting of bubbles in the housing and financial services industries.
According to the latest forecast from the professional economists' group the National Association for Business Economics (NABE), modest job gains of less than 150,000 per month are expected until the last half of 2011. Coupled with a predicted year-end unemployment rate of 9.2%, the outlook amounts to "the weakest post-recession job recovery on record," the report said. The report is compiled from the views of 51 economists, who also lowered their estimates of the long-term natural rate of unemployment to 5.8%, a half percentage point higher than in 2007.
"There seem to be three major factors that have inhibited a faster job recovery," notes Lynn Reaser, past president of NABE and chief economist at Point Loma Nazarene University in San Diego. "First, companies have been able to increase productivity with their existing workforces. Second, they have seen a bumpy, erratic and volatile recovery ... and they are not confident yet on either the sustainability or the strength of the recovery. Third, there seems to be uncertainty about government policies: [businesses] do not know what the tax outlook is, how much the cost of health care will rise and what kinds of costs they will incur."
The University of Oregon's Thoma suggests that the government could try to ease the structural unemployment challenges by incentivizing companies that want to locate or focus their hiring on areas with an able, but idle, workforce or, conversely, creating programs to help workers move to places where there are jobs. But he notes that it is hard to convince firms or workers to take that step if there is no track record of success. "We saw it here in Oregon with the end of the timber industry. For a long time, people in those small towns refused to leave and although a lot of them found ways to survive, some dropped out of the labor force. It really took a generation for things to turn around or for the parents to tell the kids, 'There aren't jobs here; you're going to have to do something different,'" he says. "The foreclosure problems and housing industry problems contribute to the lack of mobility. The government could do things to try to help that along, or give tax credits to try to relocate businesses, but firms have the right to be skeptical."
Moving where the jobs (or the workers) are may amount to an exercise in futility, Wolfers argues, because the current economic challenges go beyond a demand mismatch. "If the problem was that there were some really hot sectors and some really cold sectors and a lot of employers were hiring in the hot sectors ... there should be some employees in the economy getting tons of job offers," he notes. "The current recession has been incredibly even in its effect. There are no hot sectors. Unemployment has risen in just about every occupation and in just about every industry."
According to Wolfers, the anemic job market is largely a result of a shortage of aggregate demand: Consumers are not buying, so businesses are not producing. "People are only going to make more stuff if they can sell more stuff," he notes. "The standard way of stimulating that would be to reduce interest rates to zero. An alternative or complement to that would be for the government to just buy stuff because that creates more aggregate demand."
But interest rates are about as low as they can go, Wolfers adds, and there have only been, at best, modest successes in increasing the desire for American goods in other countries -- another way of increasing aggregate demand. The Obama administration tried to jumpstart the economy through the $800 billion federal stimulus passed in 2009. An October report by the Federal Reserve of San Francisco found that stimulus spending created or saved about two million jobs by early 2010. But most of those jobs turned out to be short-lived; according to the report, the employment impact of the stimulus fizzled to essentially zero by last August.
The scope of further government action was thrown into question by the gains made by Republicans in the mid-term elections. Bipartisan support for another stimulus bill is unlikely. President Obama cut a deal with Republican leaders, agreeing to extend Bush-era tax cuts for higher earners in addition to the middle class. But the package -- which also included an extension of unemployment benefits and a cut in Social Security payroll taxes -- remained in limbo Wednesday, with Democrats protesting that it gave up too much to the wealthy. "The recession was bigger than the stimulus," notes Wharton management professor Matthew Bidwell. "It was a big stimulus, but it's a very big recession.... All evidence shows that this kind of recession, this kind of financial crisis and bursting of bubbles, lasts longer because it takes a while for people to pay down their debt and start spending again."
As the economy picks up speed, the jobs that are created as a result might not all be concentrated on workers in the U.S. According to NABE president Richard L. Wobbekind, an associate dean at the Leeds School of Business at the University of Colorado, many large and medium-sized companies looking to grow are tapping into the potential of emerging economies, such as India or China. "Large multinational companies in the U.S. are expanding by hiring people in other parts of the world. In the 1950s, the 1960s or even in the 1980s, they would have been hiring everybody in the U.S.," he points out. "That makes it very difficult to compare [this recession to past downturns] and, frankly, makes recovering from this recession a very difficult challenge. People want me to say where exactly the jobs are going to be. I don't have an answer to that."
Missing Managers and Fighting Fires
In the meantime, even businesses with money to spend are directing the funds toward one-time costs such as infrastructure. "Hiring an employee is a major capital investment," NABE's Shearer points out. "You're not just making an investment for six months, which is why temporary tax cuts are not particularly effective [incentives]. Companies view the hiring of a person as a long-term investment: You have to train them and integrate them into your workforce. It's a significant cost."
As a short-term fix, companies may turn to hiring part-time or contract workers who, given the economic uncertainty, "allow employers to scale up without running the risk, if demand falls again, of being stuck with a person who is very expensive to fire," Bidwell says. A static workforce can have some benefits to employers, he adds, because turnover is expensive. While a company may be stuck with dissatisfied employees who would ordinarily have moved on, it may also hold onto a star who, in better circumstances, might have been lured away.
Over time, however, a lack of regular infusions of new blood can take a toll. "If you didn't [bring]in a new class of people one year, then four years later you're missing that strata of people higher up in the company," Bidwell notes. "And then you find that you have big gaps in your pipeline. That's something that companies have to manage. Those who made the mistake ... of shutting down all hiring may find three years later that they are missing crucial front-line managers."
Employers have the luxury of being picky when hiring in a tight job market. Workers who are grateful simply to have a job are less likely to bristle at taking on additional responsibilities or working extra hours. But there is a danger that firms are "losing track of how stressed people are," says Dana Kaminstein, an executive coach and fellow at Wharton Executive Education. "There's probably a lot of work that's not getting done. Maybe it's longer term work and it won't be noticed as soon, but it will start to be noticed in a year or two when something isn't happening or when there's isn't time to think or strategize about what needs to happen next because people are so busy fighting fires ... just to get through the day."
Workers who don't have jobs, however, will arguably find themselves in an even more difficult position in the years to come, experts say. Many will need to be retrained or pursue higher education degrees in order to find jobs. According to the latest figures from the Department of Labor, men and women who have been jobless for 27 weeks or more accounted for 41.9%, or 6.3 million out of a total of 15.1 million, of unemployed people in the U.S. New data from the Labor Department reported by The New York Times showed that those out of work for fewer than five weeks were more than three times as likely to find a job within the next month as people who have been out of work for more than a year.
Some economists, including NABE's Reaser, argue that the multiple extensions of unemployment benefits have actually exacerbated the negative effects that joblessness has on workers. Extended benefits begin phasing out this month if Congress doesn't take action. Reaser says that getting up and going to work every day instills a certain level of discipline that erodes along with a person's skills if he or she is unemployed for a protracted period of time. "[Not extending benefits again] would certainly hurt a lot of people financially but would probably give some incentive for people to take the jobs that are out there at lower pay," she notes. "Working helps to the extent that people are at least able to recapture the work discipline and also retain work experience. Because so many people have lost their jobs, there is no longer any stigma [to that]. But there is some problem if you have on your resume that you have not worked for two years."
Wolfers, who was one of 33 economists to sign a letter from the Economic Policy Institute to Obama and Congressional leaders urging an extension of unemployment benefits, maintains that wage subsidies are one way to keep dislocated workers in touch with the labor market. It's not necessary to create incentives for workers to seek additional training, he says, because "you already have an enormous incentive if you don't have a job."
Companies may find that unemployed men and women who eventually return to the workforce -- and even those who remained employed during the downturn -- will have a different outlook than in the past, notes Stewart D. Friedman, a Wharton management professor. The tough job market "clearly accelerates the push for an employee to recognize that you have to be more entrepreneurial and change the way you think about your employability, and not be so connected to a given firm. There's greater interest in skill development and extending your network -- building your social capital is a natural outgrowth of job insecurity."
The environment of uncertainty feeds the mindset that workers must be constantly aware of the job market -- in essence, that they must actively seek a new position, even if they are not ready to move on, because the next round of layoffs might be just around the corner. "People don't feel the same sense of commitment or loyalty to a particular company [that they once did,]" Friedman says. "Very, very few of today's business students, for example, are looking to one company to spend their entire career with. That just doesn't exist -- unless it's [their own] company. There's a lot more interest now in starting something you can control."