Structural unemployment crisis stalking U.S. economy

WASHINGTON Tue Oct 6, 2009 3:07pm EDT

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WASHINGTON (Reuters) - Millions of American job-hunters risk permanent unemployment as industries undergo radical change and some skills become irrelevant in the wake of the worst U.S. economic recession in 70 years.

There are troubling signs that unemployment in the United States is taking on a structural dimension, though the extent of it may not become clear until the severe downturn that started in December 2007 finally ends, analysts said.

Government data last Friday showed that in September, 5.4 million people had been out of work for over 27 weeks. That was up from 5 million in August and represented a startlingly large 35.6 percent of the total of unemployed Americans.

In addition, the number of those who believed they had permanently lost their jobs soared to 8.5 million from 8.1 million in August, about 54.3 percent of the jobless total.

"The figures reflect the fact that some of the jobs lost are probably lost for good and highlight that unemployment is rising more because of structural changes in the economy than in past recessions," said Tony Crescenzi, strategist and portfolio manager at Pimco in Newport Beach, California.

People staying out of work for a long time tend to lose their skills and become less attractive as workers compared to people who have been unemployed for a shorter period of time.

According to Charles Kramer, the International Monetary Fund's mission chief to the United States, such people are more likely to grow discouraged and leave the labor force entirely.

That hurts not only them, but also the broader economy. The costs of maintaining unemployment programs could also add to the government's burden as it tries to ratchet down a record $1.8 trillion budget deficit.

"They will not be counted in the employment statistics; there will be a loss, in some sense, of productive capacity for the economy," Kramer told Reuters.

Analysts noted that in previous recessions the average duration of unemployment never exceeded 26 weeks. It exceeded that level last month. Since the start of the current recession, 7.2 million people have lost their jobs.

In September, a total of 15.1 million people were on the jobless rolls, 9.8 percent of the labor force, and the White House and private forecasters believe it could go higher in coming months.

STRUCTURAL UNEMPLOYMENT A WORRY

"That does make one to wonder about long-term unemployment, what you might call structural unemployment," said Heather Boushey, senior economist at the Center for American Progress.

"I think it's too soon to tell because we are in the middle of a recession ... but I do think it is a serious concern."

The current recession is now the longest since the 1930s and was triggered by the collapse of the U.S. housing market and the ensuing global credit crisis.

Given that the wealth of many Americans is tied to their homes, the residential market collapse had a ripple effect in almost all other sectors of the economy, with manufacturing, finance and retail businesses taking much of the pain.

Annual vehicle sales have dropped from a peak of nearly 17 million vehicles in 2005, while housing starts have fallen from an annual rate of around 2.3 million units in January 2006.

Analysts reckon vehicle sales and new home construction will probably not return to those lofty levels, meaning that workers laid off from these sectors have a slim chance of getting their jobs back.

Vehicle sales this year are expected to be between 10 million and 10.5 million units. Analysts do not expect sales to exceed 12 million units over the next few years, which they said would probably be the new norm.

"That means there is excess capacity of millions in terms of what could be produced. The jobs lost there might be lost for good because we won't get back to 16 or 17 million car sales in a very long time," said Pimco's Crescenzi.

Even if they escape becoming permanently unemployed, the best hope may be for lower-paying jobs when recession eases, since many may not possess the skills required by an economy that has undergone a major transformation.

Analysts believe the economy started growing in the third quarter, driven by the rebuilding of inventories and the government's historic $787 billion stimulus package, but little or no impetus is expected from consumer spending, which normally accounts for two-thirds of U.S. economic activity.

"Once the jobs are available, there might be greater difficulty in workers accepting those jobs, there might be some kind of skills mismatch," said Harry Holzer, economist at Georgetown University and the Urban Institute.

"That could prolong the high level of unemployment."

While permanent unemployment generally has a negative impact on economic output, analysts said much depended on whether there are offsets in other areas, such as clean energy that is being pushed by the Obama administration.

"That is an area where there could be offsets, but we don't know how many jobs can be created there," said Pimco's Crescenzi. "Perhaps there could be more exports, maybe the dollar weakening will mean the replacement of jobs in those industries where jobs were lost."

(Editing by Simon Denyer and James Dalgleish)

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