Unemployment:Raised,Great Depression

November 24, 2008

unemployment Pink (as in slips) is the new brown. This fall a number of economists began predicting unemployment would rise to 8% during this recession, up from a reading of 6.5% in October. It would be the highest jobless rate in years. But put into historical perspective that forecast isn’t too bad. A quarter of all adults were out of work during the Great Depression. More recently, unemployment reached 7.8% in the early 1990s, and climbed all the way to 11% in the beginning of the 1980s. We recovered from both those recessions looking quite sprightly. But beyond the headline number is a growing unease among economists and job market watchers that, for the as many as 2.3 million people who will be asked to leave their cubicles and workspaces in the next year, it might be harder this time around for them to regain their piece of corporate America than in past recessions.

“This doesn’t seem like a simple cyclical shift in unemployment,” says Thomas Lam, an economist who tracks the U.S. economy at the Singapore-based United Overseas Bank. “What we are seeing is a structural problem in the U.S. economy, and that means it will take a lot longer for the unemployed to find jobs.” (President-Elect Obama announces his plan to create 2 million jobs by early 2011)

Unlike other economists, Lam looks beyond the total jobless number to something called employment flow, which tracks the numbers of people moving from the ranks of those receiving a regular paycheck to those who aren’t and visa versa. What Lam has found is disturbing. Currently, people out of work have just a 22% chance of landing a new job within the next month. That already makes this a worse market for job seekers than at any time during the downturns of the early 2000s or 1990s, which is as far as Lam’s data goes back. And remember, we haven’t got to 8% yet.

The underlying problem is something called misallocation of human capital. It’s a fancy term for the idea that in the past few decades the U.S. may have been producing too many MBAs and not enough RNs. Economists used to talk about it as one of those long-term risks that most people shouldn’t worry too much about. Now the problem, like the dangers of sub-prime lending, obscure financial instruments and so many of those other things we didn’t worry about, seems to actually be a problem.

The financial sector is shrinking. Technical assistance jobs shipped overseas aren’t coming back. And an aging population requires different services. Not all of these things are new, but it seems we have hit some kind of breaking point for the US job market.

The good news is we have been through similar job-market shifts before. And it may easier for a higher educated population — college graduates now make up nearly 30% of the workforce, up from 22% in 1992 — to make job transitions. But it will take time, and could be particularly painful for, say, investment bankers who have become used to fat salaries.

“My expectation is that we are going to be seeing an increase in manufacturing, and that is certainly a shift from where the economy has been headed,” says Dean Baker, co-director of the Washington, D.C. liberal-leaning think tank the Center for Economic and Policy Research. “Clearly you are going to have people moving down the pay scale.”

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