The American jobs market challenge in perspective

The unprecedented long-term ratings downgrade of US debt by Standard & Poor's and the tremors it has triggered off across the world will naturally raise pressure on President Obama to take immediate steps to address the country's high public debt. To this extent, it could possibly strengthen the forces calling for fiscal austerity, and weaken those advocating expansionary policies. This assumes far greater significance in view of rapidly increasing probability of a double-dip recession and the second recession being far worse than the first.

Jobs are arguably the biggest crisis facing the US economy. The figures are truly staggering - almost 14 million people (9.2% of the labor force) were unemployed in June, about 45% of those had been unemployed for 27 weeks or more, another 8.5 million part-time workers wanted but could not find full-time jobs, an additional 2.2 million dropped out of the labor force because they could not find work; in last five years, the percentage of the population working has fallen to 58% from 63%, reducing the number of Americans with jobs by 10 million.

As the graphic below shows, this is easily the weakest labor market recovery since the War.



The average duration of unemployment continues to break records, and in June was at an all-time high of 39.9 weeks or nine months.



The jobs gap – number of jobs the economy must add to return to its peak employment level before the 2008-9 recession and to absorb the 125,000 people who enter the labor force each month - currently around 12.3 million, will not be closed untile 2020 or later at current rates of economic growth.



A report by the National Employment Law Project points to a "Good Jobs Deficit" - the number of jobs in midwage and high-wage occupations remains significantly below the prerecession peak, while the number of jobs in lower-wage occupations has climbed back close to its former peak. It has found that while 60 percent of the jobs lost during the downturn were in midwage occupations, 73 percent of the jobs added since the recession ended had been in lower-wage occupations, like cashier, stocking clerk or food preparation worker.



Even before the onslaught of the Great Recession, the labor market was in serious trouble. Job growth between 2000 and 2007 was only half what it had been in the preceding three decades.



The US manufacturing employment has been shrinking since 1980, with the pace of decline accelerating dramatically after 2000.



Structurally, the labor market in the US has been undergoing a transformation for some years now. A new working papaer by the New York Fed points to the sharp narrowing of the labor market employment to population ratio for the US and Europe. Between 1980 and 2000, the percent of adults working was on average about 10 percentage points higher in the United States than in Europe. In a reflection of the declining labor market participation ratio in the US, the gap looks set to disappear soon.



The severe weakness in the labor market is understandable given the depth of the current recession. The graphic below highlights how far ahead or below of the long-term trend that the economy is at any given time. By this measure most post-War recessions are hardly detectable (downward blips were very small and recoveries swift), and the current situation is comparable only with the Great Depression.



The US GDP now is about $13.3 trillion dollars, when it "should" have been $15.7 trillion based on the long-term trend, or more than 15 percent below what we might think of as full output. In fact, even if the economy were to begin growing at a 5 percent annual rate, it would take until 2018 for it to catch up to the long-term trend.

Update 1 (15/8/2011)

The WSJ has this nice graphic that highlights how the less skilled and educated have taken the brunt of the weakness in the labour market.