Unemployment Report: Why Jobs Won’t Be Coming Back Soon

Another dismal report confirms it: Washington has no idea how to fix this mess. By Zachary Karabell.

07.09.11 12:01 AM ET

So yesterday’s monthly employment report, which showed a net gain of merely 18,000 jobs, once again confounded the expectations of economists—and sorely disappointed those in Washington by showing precious little job creation in the United States.

Nonetheless, Americans remain in denial. Economists rely on models that correlate GDP growth and other indicators with past patterns of employment and assume that because GDP is expanding 2 to 3 percent this year, job creation will follow. The political class continues to treat employment as a product of the recession and sees government policy as either helpful to future job growth (Democrats) or harmful (Republicans). We are stuck in a framework that treats unemployment today as a cyclical phenomenon, and assumes that employment will return as the overall economy recovers. The truth, it is becoming clear, is that unemployment is a structural issue, and that the tools being used are based on the wrong analysis and will therefore continue to fall short.

Two years after the official end of the recession in the summer of 2009, the unemployment rate remains high (9.2 percent), and the unofficial underemployment rate of part-time workers, multiple job workers, and “long-term discouraged workers” is even higher (mid-double digits). If anything the situation looks to be getting worse, not better. Recent reports have shown that state and local governments are shedding workers, and government overall accounts for nearly 17 percent of all jobs in the United States. With looming cuts to the federal budget as part of a potential debt-ceiling deal and with states shaving employees from public payrolls, the direction is down for government employment and static at best for everything from technology to services. Even health care, one of the prime sources of job creation of late, is coming under pressure as mounting costs and shifting regulations begin to have impact.

In fact, there has been almost no net job creation in the past year, according to the Bureau of Labor Statistics, with about 139 million people employed in June 2010 and about the same now. There are, by the way, many issues with how these numbers are compiled (based on telephone surveys and adjusted by statisticians with complicated formulas meant to compensate for seasonality and other factors). But they do provide an indication of overall patterns of employment, and those patterns are clear: job creation is not happening, and there is little indication that it will.

To be fair, this is a new problem for the United States in the modern era. Everyone now alive has only a memory of employment being a cyclical issue, and with every downturn since the middle of the 20th century, unemployment spiked with recession and then recovered as growth resumed. No longer.

First of all, it’s clear that companies can make a lot of money with no need for extra bodies. Corporate profits continue to rise at a double-digit rate, and as the companies of the S&P 500 report their financial results in the coming weeks, that reality will stand in stark contrast to employment and wages that remain stagnant. Even when companies do open factories in the United States, they need hundreds of highly skilled workers to manage factory floors that are increasingly sophisticated and mechanized where they might have needed thousands upon thousands decades ago. Lowering tax rates, and thereby increasing the amount of cash in individual and institutional hands, won’t help. There is no dearth of cash on hand for many companies and many wealthy individuals; yet they aren’t using that cash to hire.

Second, we don’t live in a simple economic system. We live in a multifaceted one, where people with a bachelor’s degree or above are almost fully employed (with a 4.4 percent unemployment rate, according to the latest report) and people without a high-school degree or minimal college and people of color have unemployment rates in the high teens. Some regions are booming (oil states, agricultural states); some are still mired in structural challenges (manufacturing states like Ohio, real-estate bust states like Arizona). And some are both booming and busting, such as the wide gulf between Silicon Valley and the Central Valley in California. There is no one-size-fits-all employment policy that will magically create employment across the country.

Finally, our policies assume cyclical patterns. We have spent more than $300 billion on unemployment benefits since the recession began because we think that jobs will magically appear as activity picks up and all we have to do is get people through the rough patch. It only makes sense to spend that much on unemployment insurance if it is perceived as temporary or cyclical. If the issue is structural, that money only subsidizes unemployment and low-level consumption and does nothing to create jobs. It is right not to let those out of work suffer profoundly in a society as wealthy as ours, but we are fooling ourselves if we think that money will help change the employment picture.

Indeed, with that $300 billion, it would have been more cost-effective (and probably better for collective morale) to hire millions of people on government payrolls and have them do some sort of productive work à la New Deal–era programs. But government would only do that if we collectively reached a point where we admitted that we didn’t know what to do about long-term unemployment, which is essentially what happened in the mid-1930s. It wasn’t a solution to the problem, but it was at least recognition that it was a problem for which we didn’t have a solution.

Today, there is little willingness to confront a changed economy that is not following past patterns. Yes, some economists such as the much-quoted Kenneth Rogoff and Carmen Reinhart chalk up weak employment to the aftermath of a financial crisis, but that avoids consideration that the United States is embedded in a global economy fueled by information technology on one end of the spectrum and commodities on the other—both of which put pressure on the living standards of 20th century–style high-wage earners that typified the middle-class society of the United States.

We need to stop being surprised by the continued weakness of job creation and start being prepared for it. We need to confront a changed global system and the place of the United States in it, as well as the challenges of future growth for what is on balance an extremely affluent society compared with the rest of the world. The cycles of the 20th century are not and will not be the cycles of the 21st. This time, it’s different.