Catherine Rampell illustrates the permanent damage from trusting the market

The theory that following the market would lead us into a world of prosperity and stability, as it chose the right choices with the precision of God is now shown to be so much smoke. What is not fully realized is the permanent damage to the economy and well-being of billions of people. Here in the U.S., one measure is permanent joblessness.

The Growing Underclass: Jobs Gone Forever
By CATHERINE RAMPELL
New York Times
January 28, 2010, 12:30 PM


Last night, President Obama talked about the need to put people back to work, calling job growth the “No. 1 focus in 2010.”

But one major obstacle to that goal — and one that has so far gone mostly unacknowledged — is that many of the jobs slashed during this recession are not coming back.

Lots of the bloodletting we’ve seen in the labor market has probably been permanent, not just cyclical. Many employers have taken Rahm Emanuel’s famed advice — never waste a crisis — to heart, and have used this recession as an excuse to make layoffs that they would have eventually done anyway. Some economists refer to this as the “cleansing effect” of recessions.

As a recent Congressional Budget Office report put it, “Recessions often accelerate the demise or shrinkage of less efficient and less profitable firms, especially those in declining industries and sectors.”

Think glassmaking. Or clerical work. Or, for that matter, newspapers.

Over all, the share of unemployed workers whose previous job has been permanently lost tends to rise during recessions, and the share of the unemployed who are just on temporary layoff falls. You can see both trends in the chart below.

Source: Bureau of Labor Statistics

In this recession, though, the shift from temporary layoffs to permanent job loss has been especially pronounced. In fact, the share of the unemployed who lost their jobs permanently is at its highest level since at least 1967, the first year for which the Labor Department has these numbers available.

Here’s another way to look at these trends, by what share of the unemployed are represented by each of the five categories of unemployed workers (that is, people who don’t have jobs yet because they’re new entrants to the labor market; re-entrants to the labor market; people who left their jobs; people who are on temporary layoff; and people who lost their jobs permanently).


Source: Bureau of Labor Statistics
The big ocean of blue represents the portion of the unemployed who have lost their jobs, with the lighter blue section showing those whose jobs are gone permanently.

There are multiple ways to explain why permanent job-losers represent a higher share of the unemployed this time around. Maybe, as others have suggested, many of the jobs gained in the boom years were built on phantom wealth. Or maybe the culprit is a corollary of Moore’s Law, the idea of exponential advances in technology over time. That might suggest that innovation and automation displace more and more workers by the time each recession rolls around.

Whatever the underlying cause, the result is disconcerting: compared with previous recessions, many more of the employment gains in this recovery will have to come from new jobs.

That is much easier said than done.

Workers whose entire occupations — not just the previous payroll positions they held — are disappearing (think: auto workers) will need to start over and find a new career path. But the new skills they will need take a long time to acquire.

What’s more, in addition to obtaining new degrees or training, some workers may need to move to new places in order to start a different career. But sharp declines in housing prices, plus high loan-to-value ratios on many mortgages before the downturn, will make that transition harder. Homeowners who are “underwater” — that is, who owe more in mortgage payments than their house is actually worth — may not be able to sell their house for enough money to enable them to buy a home in a new area.

All of which is to say that many of the Americans who are already out of work are likely to stay in that miserable state for a long, long time. And the longer they stay unemployed, the harder it will be for them to transition back into the work force, further adding to America’s growing underclass.

The administration is likely to have a big labor (and class) problem on its hands, and one that won’t be solved merely by an increase in the gross domestic product.