LONDON (Reuters) - Record-high long-term unemployment is testing politicians and central bankers to the utmost as the impact of a shortfall in demand is amplified by an aging population, a mismatch of skills and inadequate efforts to get people back to work.
That’s a summary not of Europe, typically associated with rigid hiring and firing laws and excessive non-wage costs, but of the United States, long renowned for a labor market as dynamic as its entrepreneurs.
America’s jobs machine is now spluttering badly, an ominous development for businesses worldwide hoping for a revival in the world’s largest economy to relieve the gloom cast by the euro zone debt crisis.
Figures due on October 7 are likely to show the unemployment rate stuck at 9.1 percent in October despite near-zero interest rates. Alarmingly, an unprecedented 30 percent of the jobless have been out of work for a year -- a stagnant pool of workers whose job prospects can only decline as their skills rust.
“There is clearly a risk for the United States of repeating the experience in European countries of cyclical unemployment turning into structural unemployment,” said Mark Keese, head of the employment analysis division at the Organization for Economic Cooperation and Development in Paris.
In a welcome piece of good news, figures on Thursday showed U.S. jobless claims fell by almost 40,000 last week -- more steeply than expected.
Disentangling the cyclical and structural reasons for the jump in long-term unemployment is difficult, especially because rapid technological change and globalization are muddying the jobs picture.
Those who see the deterioration as mainly due to the scars left by the deepest recession in 80 years say it is natural that employers will be reluctant to hire until they have more confidence that demand is strengthening.
Chris Probyn, chief economist at State Street Global Advisors, said the relationship between job vacancies and unemployed workers showed scant evidence of structural change in the labor market.
“Most all of the unemployment in the United States at the moment appears to be cyclical -- a lack of demand,” he said.
The OECD, a group of 34 industrial democracies, is less sure. Its researchers tentatively identify powerful forces at play.
“My deep view is that something has changed, and structural unemployment is higher than it used to be,” said Romain Duval, head of the OECD’s structural surveillance division.
That ‘something’ has set alarm bells ringing in Washington. President Barack Obama, facing re-election in just over a year, has proposed a $447 billion jobs package, while some Federal Reserve policymakers are exploring linking the central bank’s monetary policy stance to hitting a specific jobless rate.
Chicago Fed President Charles Evans suggested on September 7 promising to keep interest rates very low until unemployment falls to 7.5 percent or even lower, as long as inflation stays below 3 percent.
Getting unemployment down to pre-crisis levels was always going to be a long haul after a recession that cost one in six American workers their jobs. What makes the task even more daunting is evidence that the labor market might simply not be functioning as smoothly as it used to.
The median spell of unemployment reached 35 weeks during the 2007-2009 recession, up from about 10 weeks in previous downturns, according to Henry Farber, a Princeton University economics professor.
“It is clear that the dynamics of unemployment in the Great Recession are fundamentally different from unemployment dynamics in earlier recessions,” he wrote in a working paper.
One sign of the shifting sands is the time it takes someone who is laid off to find a new job or leave the work force.
This “outflow rate” has been on a clear downward trend in the past three decades in the United States, whereas it has been more or less constant for 40 years in neighboring Canada, according to the OECD.
“Why don’t we see the same thing in Canada as in the U.S.?” a puzzled Duval asked rhetorically. “This raises questions to which we have no immediate answers.”
An out-of-work American now has about a 15 percent probability of leaving unemployment within a month - well below levels observed in previous major recessions. In Canada, the chances of getting a job in that time have averaged about 33 percent since 2008.
In Germany, too, economists say success in getting the long-term unemployed back to work is one reason for the remarkable resilience of the country’s labor market. The unemployment rate in September fell to 6.9 percent, the lowest since reunification twenty years ago, the government said on Thursday.
The biggest structural headwind facing the United States is demographic.
About half of the increase in average duration of unemployment between the mid-1980s and mid-2000s can be explained by the graying of the workforce - youths tend to have shorter spells out of work - and by more women joining the labor force, according to Daniel Aaronson and fellow researchers at the Chicago Fed.
In a paper published last year, Aaronson reckoned another 10 percent to 25 percent was due to extensions in jobless insurance benefits, which can act as a disincentive to find work, and the rest to weak demand for labor.
Precisely because the reasons are unclear, the OECD says the case for learning from best practice is compelling for the ten or so of its member states, including the United States, that have recorded a significant rise in long-term joblessness.
-- Budgets permitting, governments can do more to help the unemployed back to work. The United States spends only 0.16 percent of GDP on active labor market policies, such as training programs and job search assistance, compared with an OECD average of 0.62 percent.
-- Several countries have managed to cushion the impact of the crisis on jobs through government-subsidized short-time working. Firms were able to retain skilled workers who could then immediately meet the subsequent upturn in demand. Such schemes saved 234,000 jobs in Germany and 416,000 in Japan, researchers estimate.
-- The recession also makes a compelling case for investing more in education and lifelong learning as globalization and technological change hollow out jobs calling for mid-range skills: the job loss rate for U.S. workers with 12 years of education was 19.4 percent in 2007-2009; for those with at least 16 years of education, it was 11.0 percent, according to Princeton’s Farber.
Yet whereas more and more women in the West are completing college, the rate of increase among males is anemic -- a chilling prospect in Washington and other capitals facing a shortage of skilled industrial workers as baby-boomers retire.
“This exacerbates rising wage inequality and retards the growth of advanced economies, which depend on their best-educated workers to develop and commercialize the innovative ideas that drive economic growth,” wrote David Autor, an economics professor at the Massachusetts Institute of Technology.
Additional reporting by Louise Egan in Ottawa; editing by Patrick Graham