What If the Jobs Don't Ever Come Back?

A lot of jobs fed by the housing bubble are gone, and it's not clear what will replace them or how long it will take.

Right now, average Americans aren't buying the recovery story. I can't say I blame them.

The 'real' unemployment rate

The numbers speak for themselves: Of the 8.7 million people who lost their jobs during the recession, more than 7.3 million are still without work. There are still nearly five job seekers for every job opening. The average length of unemployment was 35 weeks in June, compared with an average of 14 weeks going back to 1948. And the percentage of the unemployed who have been out of work for more than 27 weeks stands at 46%, compared with 30% last year and 16.2% in 2007. Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=e3479a8e-8fb2-4d6c-8740-abe3db374c10,438c2793-32f8-40d4-bac4-721d0f4b5e01,bced8a90-ef83-4e55-99a2-ddb776e91fa3,34a62a10-1ce4-4f24-8afa-d51ba77f7eec,75f4b4bb-5a06-4854-9a9a-a1eec102764f,f930cb9d-b70f-4fa0-8f80-89e594f8253f,6aa3aabd-bb3d-474c-8d5c-42cd4b00e589,00500621-208b-4360-bc81-e3a47bef642b,f18021fd-243e-4e20-af85-a8de90fd4518", "player.fr": "iv2_en-us_money_article_16x9-Investing-MutualFunds"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=e3479a8e-8fb2-4d6c-8740-abe3db374c10,438c2793-32f8-40d4-bac4-721d0f4b5e01,bced8a90-ef83-4e55-99a2-ddb776e91fa3,34a62a10-1ce4-4f24-8afa-d51ba77f7eec,75f4b4bb-5a06-4854-9a9a-a1eec102764f,f930cb9d-b70f-4fa0-8f80-89e594f8253f,6aa3aabd-bb3d-474c-8d5c-42cd4b00e589,00500621-208b-4360-bc81-e3a47bef642b,f18021fd-243e-4e20-af85-a8de90fd4518;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');We're told by the people in Washington that it will be years before the economy puts all those folks back to work. That prompts the question: What if the jobs don't come back at all?

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Waiting for the checks This problem was highlighted by congressional feuding in recent weeks over extending unemployment benefits. About 3 million people had stopped getting unemployment checks before President Barack Obama signed a bill restoring benefits two weeks ago.

Whichever side one was on during that debate, the overriding concern cuts across party lines: How long will a large chunk of the nation's work force remain sidelined?

While those jobless benefits were blocked, they collectively represented a $45 billion hit to the nation's income. It's no wonder that retail sales have been disappointing lately.

All this uncertainty and fear weigh on sentiment. Surveys of consumer confidence show that job prospects and wage growth are top-of-mind concerns. According to The Conference Board, the percentage of consumers who expect an increase in income over the next six months has fallen to just 10% -- a depth not seen since April 2009. As a result, consumer spending is sliding again. And this threatens to undo the current manufacturing rebound. The longer this goes on, the more vulnerable the economy becomes to a so-called double-dip recession.

To be clear: Forward-looking indicators of job growth remain positive. Hiring plans are up. Job listings are up. Staffing companies are doing robust business. For now, another recession isn't on the horizon. In fact, Deutsche Bank economist Joseph LaVorgna expects the unemployment rate to fall to 9.3% when the July jobs numbers are released Friday. This is well off the peak of 10.1% reached in October.

But the cruel and simple truth is that lost jobs don't always come back. Look at the industrial Northeast and you might ask, is America going the way of Detroit?The brutal jobs correction This is the unsympathetic calculus of a free-market economy: Years of over-investment in the housing sector need to be undone, just as too much investment in technology in the 1990s resulted in the dot-com bust and big layoffs for information-technology workers. We don't need all those construction workers, real-estate agents and mortgage brokers anymore. And we don't yet know where those people will work next.

The bad news is that the specter of long-term unemployment will push up the "natural," or structural, unemployment rate as idled workers' skills slip and entire swaths of the labor force are forced to retrain and move out of the areas of the country that were artificially propped up by the housing bubble. Not only does this mean the unemployment rate will fall at only a gradual pace, but it will limit the ability of the Federal Reserve to keep interest rates low.

Something similar happened in the early 1980s as the country transitioned from a focus on exports and manufacturing and embraced the technology revolution. The unemployment rate climbed from a low of 3.4% in 1969 to a high of 10.8% in 1982. It took an additional 18 years before unemployment moved back under 4%.

For Société Générale economist Aneta Markowska, it's clear that the Great Recession has lowered the productive capacity of the U.S. economy. Markowska has been watching a measure of structural unemployment called the non-accelerating inflation rate of unemployment, or NAIRU. And it's set to rise.

Because of the skills mismatch in the labor market, Markowska's calculations suggest the NAIRU could increase from the Congressional Budget Office's current 5% estimate to something approaching 6.3% or more. This is a measure of the lower bound of the unemployment rate -- or how strong the job market can get.

Should unemployment fall under this level, it would fan the flames of inflation and force the Fed to raise interest rates. So think of the NAIRU as the economy's natural speed limit.

If this change doesn't seem like much, consider this: The increase suggests the Fed will make its first interest-rate hike within the next six months, likely slowing the economy and limiting job growth. Without the rise in the NAIRU, the Fed would keep rates low through 2012, according to Markowska.

The NAIRU is based on the fact that looking for a job or hiring a new worker is time-consuming and difficult. You've got to match skills with desirability and a plethora of other factors. And the manner by which workers are reallocated across the economy is burdensome. If one sector of the economy demands more labor, wages must first increase, which then attracts the attention of other sectors' laborers, who must then retrain before finding jobs in this desirable new line of work.

Historically, there has been a strong connection between increases in long-term unemployment and the NAIRU. This is because the arduous process of labor reallocation described above becomes even more difficult in the aftermath of recessions.

All of this will become increasingly important in the years to come. Markowska believes the structural changes in the economy are even more pronounced now than in the 1980s, which was the last time the unemployment rate moved into double-digit territory. And for that period, she estimates that the NAIRU jumped to nearly 8%. So things could turn out even worse than she's forecasting.

If that sounds like economic analysis for academics, here's the takeaway: Based on the history, pre-recession unemployment rates won't be seen again until 2027 as idled workers find it harder and harder to land jobs.

Continued: Room for optimismMore from MSN Money

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Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=8.307693; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=13;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board Most Recent ArticlesA sure way to invest and loseIs this America's worst investment?Congress overhauls your portfolio3 ways to invest like the richWhy are CEOs so cocky these days?MSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Articles by Anthony MirhaydariSafe plays for shellshocked investors 07/28/2010Why are CEOs so cocky these days? 07/21/2010Could the Dow fall to 1,000? 07/14/2010More . . .Fund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8');msft.msn._ic.cid='6i23eqjqupde4teupge8ndtf775302yj';msft.msn._ic.pst=false;msft.msn._ic.pgn=1; Join the discussion!Add a commentShow commentsSort by:Newest firstOldest first_uc2f12('iucGo');1 - 2 of 2PreviousNextLost Dollar #1Wednesday, August 04, 2010 8:37:54 PMI am not part of the Illuminati, but I have a few thoughts on the New Global Economy. I believe having 10% Unemployment is going to be the new acceptable norm. For those that believe Unions disintegrated the Free Market, they were mere pawns. Whether you are a part of Organized Labor, and you demand $x amount of dollars to do a certain job, but someone who is not Organized Labor demands less $y, the clear alternative is to outsource "Your" job to a Market where workers demand $.01 to do the job. Also, if that Market does not have to abide by EPA, OSHA standards, etc. then all the better. Manufacturing probably starting leaving the US borders with the onset of Steel in Pittsburgh, PA, followed by Textiles,and now everything has been outsourced/off-shored to a Developing or Emerging Market so you can now Invest in their Infrastructure. When CEO's, Executives, Board of Directors, and Shareholders demand better performance, how do you think they are going to get better Dividends/Earnings? They are going to crop the Labor Market. Hence, you have what we have--Unemployment while Executives get nice bonuses.Alternative Energy--Solar,Wind, Hydro,Nuclear. I have come to believe that this is probably not going to be the time this occurs. Uranium Deposits are heavy in Canada and Australia, but any potential Fallout could bring disastrous results. I have not heard anymore from T.Boone Pickens Plan so everyone has either disappeared or it was all Smoke and Mirrors.The Powers at be still are pushing for Oil exploration. With two Wars, Iraq and Afghanistan, I started pulling out the Atlas to see what our interests are or what we hope to accomplish. With Iran being an Enemy of the State and now the withdrawal of Troops from Iraq, US involvement is being pushed into Afghanistan (Will we end up looking like Russia?) What Countries & Individuals are pouring money into Iraq & Afghanistan to counter any US progress? I am placing my bets on Pakistan for the partner the US needs. My reason comes down to:Karachi--Capital City,Financial, and Shipping Port that can house the Mega Tankers. Is there a deal hatched to pipeline oil from the Caspian down into Pakistan thus keeping Iran where the US needs to keep them? Is access to Oil the reason? History will always have enemies: Nazis, Communists, Terrorists.I am no longer going to slap China around like I normally do as they have now taken over as the Second Largest Economy behind the US, but for how long?ReplyReport Abusesr0343_67adljdogj #2Wednesday, August 04, 2010 9:53:24 PMAlthough it's still very early to gauge which sectors of the economy are poised to create the most jobs, there are a few standouts. Job categories related to mining, metals, plastics and rubber products have seen healthy increases over the past few months.

Shouldn't we be doing less of this? And is "healthy" the right adjective to use.

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Waiting for the checks This problem was highlighted by congressional feuding in recent weeks over extending unemployment benefits. About 3 million people had stopped getting unemployment checks before President Barack Obama signed a bill restoring benefits two weeks ago.

Whichever side one was on during that debate, the overriding concern cuts across party lines: How long will a large chunk of the nation's work force remain sidelined?

While those jobless benefits were blocked, they collectively represented a $45 billion hit to the nation's income. It's no wonder that retail sales have been disappointing lately.

All this uncertainty and fear weigh on sentiment. Surveys of consumer confidence show that job prospects and wage growth are top-of-mind concerns. According to The Conference Board, the percentage of consumers who expect an increase in income over the next six months has fallen to just 10% -- a depth not seen since April 2009. As a result, consumer spending is sliding again. And this threatens to undo the current manufacturing rebound. The longer this goes on, the more vulnerable the economy becomes to a so-called double-dip recession.

To be clear: Forward-looking indicators of job growth remain positive. Hiring plans are up. Job listings are up. Staffing companies are doing robust business. For now, another recession isn't on the horizon. In fact, Deutsche Bank economist Joseph LaVorgna expects the unemployment rate to fall to 9.3% when the July jobs numbers are released Friday. This is well off the peak of 10.1% reached in October.

But the cruel and simple truth is that lost jobs don't always come back. Look at the industrial Northeast and you might ask, is America going the way of Detroit?The brutal jobs correction This is the unsympathetic calculus of a free-market economy: Years of over-investment in the housing sector need to be undone, just as too much investment in technology in the 1990s resulted in the dot-com bust and big layoffs for information-technology workers. We don't need all those construction workers, real-estate agents and mortgage brokers anymore. And we don't yet know where those people will work next.

The bad news is that the specter of long-term unemployment will push up the "natural," or structural, unemployment rate as idled workers' skills slip and entire swaths of the labor force are forced to retrain and move out of the areas of the country that were artificially propped up by the housing bubble. Not only does this mean the unemployment rate will fall at only a gradual pace, but it will limit the ability of the Federal Reserve to keep interest rates low.

Something similar happened in the early 1980s as the country transitioned from a focus on exports and manufacturing and embraced the technology revolution. The unemployment rate climbed from a low of 3.4% in 1969 to a high of 10.8% in 1982. It took an additional 18 years before unemployment moved back under 4%.

For Société Générale economist Aneta Markowska, it's clear that the Great Recession has lowered the productive capacity of the U.S. economy. Markowska has been watching a measure of structural unemployment called the non-accelerating inflation rate of unemployment, or NAIRU. And it's set to rise.

Because of the skills mismatch in the labor market, Markowska's calculations suggest the NAIRU could increase from the Congressional Budget Office's current 5% estimate to something approaching 6.3% or more. This is a measure of the lower bound of the unemployment rate -- or how strong the job market can get.

Should unemployment fall under this level, it would fan the flames of inflation and force the Fed to raise interest rates. So think of the NAIRU as the economy's natural speed limit.

If this change doesn't seem like much, consider this: The increase suggests the Fed will make its first interest-rate hike within the next six months, likely slowing the economy and limiting job growth. Without the rise in the NAIRU, the Fed would keep rates low through 2012, according to Markowska.

The NAIRU is based on the fact that looking for a job or hiring a new worker is time-consuming and difficult. You've got to match skills with desirability and a plethora of other factors. And the manner by which workers are reallocated across the economy is burdensome. If one sector of the economy demands more labor, wages must first increase, which then attracts the attention of other sectors' laborers, who must then retrain before finding jobs in this desirable new line of work.

Historically, there has been a strong connection between increases in long-term unemployment and the NAIRU. This is because the arduous process of labor reallocation described above becomes even more difficult in the aftermath of recessions.

All of this will become increasingly important in the years to come. Markowska believes the structural changes in the economy are even more pronounced now than in the 1980s, which was the last time the unemployment rate moved into double-digit territory. And for that period, she estimates that the NAIRU jumped to nearly 8%. So things could turn out even worse than she's forecasting.

If that sounds like economic analysis for academics, here's the takeaway: Based on the history, pre-recession unemployment rates won't be seen again until 2027 as idled workers find it harder and harder to land jobs.

Continued: Room for optimismMore from MSN Money

 1 | 2 | next >

Shouldn't we be doing less of this? And is "healthy" the right adjective to use.

Read Full Article »