Unemployment is becoming a structural problem in the United States. As we enter another jobless recovery this becomes increasingly worrisome. In a recent report TCW highlighted this unusual phenomenon:
“There are two aspects of last week’s employment numbers that warrant special attention. As I mentioned above and as is illustrated in the following chart, the duration of unemployment has increased. Even in the depths of the severe recession of 1981-1982, less than 30% of the work force was unemployed for 27 weeks or longer, and the figure dropped quickly during the subsequent recovery.”
“Second, last month’s decline in the unemployment rate stemmed in good measure from the drop in the U.S. labor force participation rate, defined as the percentage share of a country’s working age population that is actually working or seeking employment. The 64.4% figure posted in December was the lowest figure since 1984. What does the plunge in the participation rate since the global crisis of 2008 signify? While the rate also tends to drop when rising affluence of a community leads to early retirement or a shift from two-career to one-career families, the decline in the participation rate over the past couple of years appears to be a result of workers’ growing disenchantment with employment prospects.”
“From a policy perspective, both factors above suggest that unemployment is no longer a cyclical phenomenon as has typically been the case in post-war U.S. recessions. And as joblessness becomes ingrained in the economic fabric – due to employers increasingly substituting capital for labor, as women and 16-24 year olds leave the work force, and as frustrated workers stop looking for employment – it becomes increasingly immune to the impact of monetary and fiscal easing. It is not surprising, therefore, that the quantitative easing program hinted at by Chairman Bernanke on August 27 has done little to improve the outlook for jobs. A meaningful remedy requires steps well beyond the purview of the country’s chief monetary authority.”
I would argue that the issue is far more problematic than anything a policy response can handle (and far more complex than I have the space and time to deal with here). Not only has automation created a far more efficient workplace (that literally requires fewer workers), but imbalances have caused jobs and talents to transfer into industries where they were never really productive in the first place. The primary example of this has been the endless stream of talented educated students who have poured into banks, investment banks and hedge funds over the years. For the most part, they are doing little of service for the real economy aside from collecting a paycheck and helping a bank separate the middle class from its savings.
Even worse is the potential lost output that the country has experienced due to this incredible financialization. The Bill Gates of tomorrow is no longer dreaming about the next great technological invention. He is dreaming about how to run the next great hedge fund. In addition, we have experienced an unprecedented number of established PhDs who are now transferring industries in order to help Bank XYZ generate algorithms that “predict” unpredictable market movements. The destruction that this financialization of our economy has caused is truly unquantifiable.
Even worse, this has helped to create a bloated credit based economy. You could actually argue that we don’t have a structural unemployment problem at all. Rather, we have an economy that is simply far larger than it should be because credit based growth has helped to create imbalances. But through government bailouts and de-regulation we have managed to patch this problem together and create the semblance of a working system and a healthy growing economy. The unemployment problem clearly tells a different story. And unfortunately, there are no signs of a changing tide.