Right now, average Americans aren't buying the recovery story. I can't say I blame them.
Sure, stocks are up nearly 70% from their bear market lows. Corporate profits are rising. The economy is expanding. But many Americans feel left behind. The problem is joblessness and particularly the growing ranks of the long-term unemployed.
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.
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.
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.