Even in a recovery, many careers will never bounce back
May 5, 2009
By Matthew Benjamin and Rich Miller
The post-recession US may be saddled with high unemployment even after good times finally return. Hundreds of thousands of jobs have vanished forever in industries such as car manufacturing and financial services. Millions of people who were fired or laid off will find it harder to get hired again.
This restructuring - in what former Federal Reserve chairman Paul Volcker calls "the Great Recession" - is causing some economists to reconsider what might be the "natural" rate of unemployment: a level that neither accelerates nor decelerates inflation. This state of equilibrium is often described as full employment.
Fallout from the recession implies a "markedly higher" natural rate of unemployment, says Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel Prize in economics. "It was 5.5 percent; maybe it will be 6.5 percent, maybe 7 percent."
The US government may report on Friday that the jobless rate jumped to 8.9 percent last month from 8.5 percent in March, according to economists surveyed by Bloomberg. This rate would be the highest since 1983.
Laurence Ball, an economics professor at Johns Hopkins University in Baltimore, says unemployment may peak at 10 percent, and "it will be a long time before we see 5 percent" again.
A burst of productivity growth starting in the mid-1990s helped lower the natural rate of unemployment to about 5 percent from 6 percent, as profit-flush companies took on more workers. Now the fear is that this will be reversed. Already, almost a quarter of the unemployed have been out of work for 27 weeks or longer, the highest proportion since 1983. Permanent dismissals - for workers who don't expect ever to regain the same job - hit a record 51.5 percent in March. Mass lay-offs, those that affect 50 or more people, rose to a record 2 933, comprising almost 300 000 lost positions.
About 27 percent of automotive manufacturing jobs - roughly 257 000 - have been cut during the recession as car manufacturers trimmed operations.
General Motors (GM), the largest US car maker, has set a target of reducing 47 000 positions worldwide this year. It aims to eliminate about 2 600 of its 6 200 US dealerships by next year, a move the National Automobile Dealers' Association estimates will cost as many as 137 000 jobs. GM wants to sell or eliminate its Pontiac, Saturn, Hummer and Saab brands.
Chrysler filed for bankruptcy protection on April 30 to streamline its operations in a reorganisation that includes Italy's Fiat as a partner. Since being spun off from Germany's Daimler in August 2007, Chrysler has fired about 32 000 workers.
Half of the vehicle industry jobs being cut "are gone for good", says Sean McAlinden, the chief economist at the Center for Automotive Research.
Employment in the financial sector - which has seen the demise of investment banks Bear Stearns and Lehman Brothers Holdings - has contracted by 4.5 percent, or 376 000, with more losses to come.
UBS, the biggest Swiss bank, confirmed plans last week to cut 2 000 positions in its US wealth management unit.
"Some sectors … seem to have clearly got well overbuilt," says Orley Ashenfelter, an economist at Princeton University and a former Labor Department official. "Financial services is an extreme example."
In the publishing industry, which is suffering from falling advertising and a migration of readers to the internet, employment is down almost 8 percent since the recession began in December 2007, according to the Bureau of Labor Statistics.
Average daily circulation for 395 newspapers fell 7.1 percent to 34.4 million in the six months to March, the Audit Bureau of Circulations said last week. Five publishers - including Tribune, the parent company of the Los Angeles Times and the Chicago Tribune - have sought bankruptcy protection.
"Most of the publishing job cuts we've seen are probably going to be permanent," says John Morton, a media industry analyst and president of Morton Research.
Lay-offs now taking place are similar to those in the recession of 1981 and 1982, when unemployment peaked at 10.8 percent and 2.8 million jobs disappeared.
People who lost stable work in the early 1980s sustained large and long-lasting earnings reductions, according to research by economists Till von Wachter of Columbia University, Jae Song of the Social Security Administration and Joyce Manchester of the Congressional Budget Office.
A typical 40-year-old man who became unemployed at the time went on to suffer a 20 percent loss in lifetime earnings, they found. The income hit is all the greater when displaced workers have to start over in new careers because their old employers were in sectors that have shrunk.
"People losing their jobs now in permanently downsizing industries have to be aware that they're particularly at risk of pretty large losses" to lifetime wages, says Von Wachter, who briefed staff at the Fed and the European Central Bank last month on the effects of mass lay-offs.
Lawrence Mishel, the president of the Economic Policy Institute in Washington, says: "People tend to think that when you come out of a recession you get the labour market you had when you entered it. This time you may get something quite different." - Bloomberg
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