U.S. capital city, once recession-proof, feels pain

WASHINGTON Wed Jul 1, 2009 3:03pm EDT

WASHINGTON (Reuters) - The U.S. economy's deep downturn has accelerated seismic shifts in the labor force, creating a new underclass of economic exiles even in the nation's capital, once considered recession-proof.

Washington, which typically weathers recession relatively well thanks to the flood of government spending that usually comes during downturns, has seen unemployment rise sharply as the city struggles to find residents with the right skills to fill openings.

"In the past, we always thought that the District was relatively immune from national recessions," Natwar Gandhi, Washington's chief financial officer, told Reuters in an interview. "That is no longer the case. The recession has caught up with us."

When the U.S. economy tipped into recession in December 2007, the city's unemployment rate stood at just 5.8 percent. In May, it hit 10.7 percent, well above the national average of 9.4 percent.

Recessions always bring a rise in unemployment. What stands out in the current episode is the speed and magnitude of the job losses across the country, and how widely the pain has spread.

Many lost jobs won't return and many of the freshly unemployed workers, who lack the appropriate skills to capture jobs in sectors that are creating them, face a possibly prolonged period of joblessness.

Gandhi said 4,500 jobs have been created in Washington over the past year, but that was dwarfed by the 13,000 positions lost. And many of those new jobs are going to people who live outside of Washington.

"Our fundamental problem in the District is that even though we are creating jobs, our residents do not have the skills that you need for those jobs," Gandhi said.

Economists say that disconnect reflects a structural change that was already under way before the recession struck.

In much of the country, the recession has only quickened the move away from manufacturing and toward information-based and service sector jobs that has been evident since the 1970s.

In Washington, which never had a large manufacturing base, the ongoing shift is manifested more in a switch to higher-skilled service jobs and employment that requires college degrees from lower-skilled ones.

"A lot of the jobs that were lost are jobs on the way out anyway," said Stephen Fuller, director of the Center for Regional Analysis at George Mason University in the Washington suburbs. "The recession just accelerated the process."

Former U.S. Labor Secretary Robert Reich wrote in the 1990s that only one class of highly educated workers would be able to compete in the global information-based economy of the 21st century. This new singular working class seems to be emerging.

UNDERCLASS OF THE NEW ECONOMY

For many Washington residents, this puts them at a huge disadvantage. Slightly more than one in three Washington residents cannot read or write on a functional level, giving the city the dubious distinction of having one of the highest illiteracy rates in the nation.

These residents have little hope of expanding past the underclass of the new economy.

"The problem is that we are adding jobs that require college educations," Fuller said. "The unemployed workers in the District tend to have high school educations or less. Some of them will never go back to work. That's a part of the problem with recessional unemployment; it becomes structural."

"The District's unemployment rate is going to go much higher, as is the nation's, but if you look at who is unemployed, it tends to be largely male because the kinds of jobs they lost and substantially less-educated persons and minorities," he said. "It discriminates against people on the edges."

The same holds true nationally. U.S. government data shows that male unemployment reached 10.5 percent in May, while female joblessness stood at 8 percent.

Meanwhile, the jobless rate for white men was 9.7 percent last month, compared to 18 percent for African-American men, a gap that has widened in the course of the recession.

For a graphic showing the unemployment gap since the start of the recession, click here

The employment dynamics of the Washington metropolitan area are a good indication of how the new economy appears to be playing out.

The surrounding counties in Virginia and Maryland are among the wealthiest in the country. In nearby Arlington county, Virginia, where residents are among the most educated, the unemployment rate is 4.5 percent.

Most of the new jobs created in Washington are going to relatively better educated people who live in the suburbs -- not the newly unemployed city residents.

"It's a wake-up call," Fuller said of the District's high jobless rate. "There are all sorts of anti-social behaviors that come out of long-term unemployment -- desperation, increased child hunger -- and the next generation living in these households may become a long-term problem."

(Editing by Andrea Ricci)