How a New Jobless Era Will Transform America

From the Atlantic | March 2010

The
Great Recession may be over, but this era of high joblessness is
probably just beginning. Before it ends, it will likely change the life
course and character of a generation of young adults. It will leave an
indelible imprint on many blue-collar men. It could cripple marriage as
an institution in many communities. It may already be plunging many
inner cities into a despair not seen for decades. Ultimately, it is
likely to warp our politics, our culture, and the character of our
society for years to come.

By Don Peck

Image credit: Fredrik Broden

How should we characterize
the economic period we have now entered? After nearly two brutal years,
the Great Recession appears to be over, at least technically. Yet a
return to normalcy seems far off. By some measures, each recession
since the 1980s has retreated more slowly than the one before it. In
one sense, we never fully recovered from the last one, in 2001: the
share of the civilian population with a job never returned to its
previous peak before this downturn began, and incomes were stagnant
throughout the decade. Still, the weakness that lingered through much
of the 2000s shouldn't be confused with the trauma of the past two
years, a trauma that will remain heavy for quite some time.

The unemployment rate hit 10 percent in October, and there are good
reasons to believe that by 2011, 2012, even 2014, it will have declined
only a little. Late last year, the average duration of unemployment
surpassed six months, the first time that has happened since 1948, when
the Bureau of Labor Statistics began tracking that number. As of this
writing, for every open job in the U.S., six people are actively
looking for work.

All of these figures understate the magnitude of the jobs crisis.
The broadest measure of unemployment and underemployment (which
includes people who want to work but have stopped actively searching
for a job, along with those who want full-time jobs but can find only
part-time work) reached 17.4 percent in October, which appears to be
the highest figure since the 1930s. And for large swaths of
society-young adults, men, minorities-that figure was much higher
(among teenagers, for instance, even the narrowest measure of
unemployment stood at roughly 27 percent). One recent survey showed
that 44 percent of families had experienced a job loss, a reduction in
hours, or a pay cut in the past year.

There is unemployment, a brief and relatively routine transitional
state that results from the rise and fall of companies in any economy,
and there is unemployment-chronic, all-consuming. The former is
a necessary lubricant in any engine of economic growth. The latter is a
pestilence that slowly eats away at people, families, and, if it
spreads widely enough, the fabric of society. Indeed, history suggests
that it is perhaps society's most noxious ill.

The worst effects of pervasive joblessness-on family, politics,
society-take time to incubate, and they show themselves only slowly.
But ultimately, they leave deep marks that endure long after boom times
have returned. Some of these marks are just now becoming visible, and
even if the economy magically and fully recovers tomorrow, new ones
will continue to appear. The longer our economic slump lasts, the
deeper they'll be.

If it persists much longer, this era of high joblessness will likely
change the life course and character of a generation of young
adults-and quite possibly those of the children behind them as well. It
will leave an indelible imprint on many blue-collar white men-and on
white culture. It could change the nature of modern marriage, and also
cripple marriage as an institution in many communities. It may already
be plunging many inner cities into a kind of despair and dysfunction
not seen for decades. Ultimately, it is likely to warp our politics,
our culture, and the character of our society for years.

The Long Road Ahead

Since last spring, when fears of economic apocalypse began to ebb, we've been treated to an alphabet soup of predictions about the recovery. Various economists have suggested that it might look like a V (a strong and rapid rebound), a U (slower), a W (reflecting the possibility of a double-dip recession), or, most alarming, an L
(no recovery in demand or jobs for years: a lost decade). This summer,
with all the good letters already taken, the former labor secretary
Robert Reich wrote on his blog that the recovery might actually be
shaped like an X (the imagery is elusive, but Reich's argument
was that there can be no recovery until we find an entirely new model
of economic growth).

No one knows what shape the recovery will take. The economy grew at
an annual rate of 2.2 percent in the third quarter of last year, the
first increase since the second quarter of 2008. If economic growth
continues to pick up, substantial job growth will eventually follow.
But there are many reasons to doubt the durability of the economic
turnaround, and the speed with which jobs will return.

Historically, financial crises have spawned long periods of economic
malaise, and this crisis, so far, has been true to form. Despite the
bailouts, many banks' balance sheets remain weak; more than 140 banks
failed in 2009. As a result, banks have kept lending standards tight,
frustrating the efforts of small businesses-which have accounted for
almost half of all job losses-to invest or rehire. Exports seem
unlikely to provide much of a boost; although China, India, Brazil, and
some other emerging markets are growing quickly again, Europe and
Japan-both major markets for U.S. exports-remain weak. And in any case,
exports make up only about 13 percent of total U.S. production; even if
they were to grow quickly, the impact would be muted.

Most recessions end when people start spending again, but for the
foreseeable future, U.S. consumer demand is unlikely to propel strong
economic growth. As of November, one in seven mortgages was delinquent,
up from one in 10 a year earlier. As many as one in four houses may now
be underwater, and the ratio of household debt to GDP, about 65 percent
in the mid-1990s, is roughly 100 percent today. It is not merely animal
spirits that are keeping people from spending freely (though those
spirits are dour). Heavy debt and large losses of wealth have forced
spending onto a lower path.

So what is the engine that will pull the U.S. back onto a strong growth path? That turns out to be a hard question. The New York Times columnist Paul Krugman, who fears a lost decade, said in a lecture
at the London School of Economics last summer that he has "no idea" how
the economy could quickly return to strong, sustainable growth. Mark
Zandi, the chief economist at Moody's Economy.com, told the Associated Press
last fall, "I think the unemployment rate will be permanently higher,
or at least higher for the foreseeable future. The collective psyche
has changed as a result of what we've been through. And we're going to
be different as a result."

One big reason that the economy stabilized last summer and fall is
the stimulus; the Congressional Budget Office estimates that without
the stimulus, growth would have been anywhere from 1.2 to 3.2
percentage points lower in the third quarter of 2009. The stimulus will
continue to trickle into the economy for the next couple of years, but
as a concentrated force, it's largely spent. Christina Romer, the chair
of President Obama's Council of Economic Advisers, said last fall, "By
mid-2010, fiscal stimulus will likely be contributing little to further
growth," adding that she didn't expect unemployment to fall
significantly until 2011. That prediction has since been echoed, more
or less, by the Federal Reserve and Goldman Sachs.

The economy now sits in a hole more than 10 million jobs deep-that's
the number required to get back to 5 percent unemployment, the rate we
had before the recession started, and one that's been more or less
typical for a generation. And because the population is growing and new
people are continually coming onto the job market, we need to produce
roughly 1.5 million new jobs a year-about 125,000 a month-just to keep
from sinking deeper.

Even if the economy were to immediately begin producing 600,000 jobs
a month-more than double the pace of the mid-to-late 1990s, when job
growth was strong-it would take roughly two years to dig ourselves out
of the hole we're in. The economy could add jobs that fast, or even
faster-job growth is theoretically limited only by labor supply, and a
lot more labor is sitting idle today than usual. But the U.S. hasn't
seen that pace of sustained employment growth in more than 30 years.
And given the particulars of this recession, matching idle workers with
new jobs-even once economic growth picks up-seems likely to be a
particularly slow and challenging process.

The construction and finance industries, bloated by a decade-long
housing bubble, are unlikely to regain their former share of the
economy, and as a result many out-of-work finance professionals and
construction workers won't be able to simply pick up where they left
off when growth returns-they'll need to retrain and find new careers.
(For different reasons, the same might be said of many media
professionals and auto workers.) And even within industries that are
likely to bounce back smartly, temporary layoffs have generally given
way to the permanent elimination of jobs, the result of workplace
restructuring. Manufacturing jobs have of course been moving overseas
for decades, and still are; but recently, the outsourcing of much
white-collar work has become possible. Companies that have cut domestic
payrolls to the bone in this recession may choose to rebuild them in
Shanghai, Guangzhou, or Bangalore, accelerating off-shoring decisions
that otherwise might have occurred over many years.

New jobs will come open in the U.S. But many will have different
skill requirements than the old ones. "In a sense," says Gary Burtless,
a labor economist at the Brookings Institution, "every time someone's
laid off now, they need to start all over. They don't even know what
industry they'll be in next." And as a spell of unemployment lengthens,
skills erode and behavior tends to change, leaving some people
unqualified even for work they once did well.

Ultimately, innovation is what allows an economy to grow quickly and
create new jobs as old ones obsolesce and disappear. Typically, one
salutary side effect of recessions is that they eventually spur booms
in innovation. Some laid-off employees become entrepreneurs, working on
ideas that have been ignored by corporate bureaucracies, while
sclerotic firms in declining industries fail, making way for nimbler
enterprises. But according to the economist Edmund Phelps, the
innovative potential of the U.S. economy looks limited today. In a
recent Harvard Business Review article,
he and his co-author, Leo Tilman, argue that dynamism in the U.S. has
actually been in decline for a decade; with the housing bubble fueling
easy (but unsustainable) growth for much of that time, we just didn't
notice. Phelps and Tilman finger several culprits: a patent system
that's become stifling; an increasingly myopic focus among public
companies on quarterly results, rather than long-term value creation;
and, not least, a financial industry that for a generation has focused
its talent and resources not on funding business innovation, but on
proprietary trading, regulatory arbitrage, and arcane financial
engineering. None of these problems is likely to disappear quickly.
Phelps, who won a Nobel Prize for his work on the "natural" rate of
unemployment, believes that until they do disappear, the new floor for
unemployment is likely to be between 6.5 percent and 7.5 percent, even
once "recovery" is complete.

It's likely, then, that for the next several years or more, the jobs
environment will more closely resemble today's environment than that of
2006 or 2007-or for that matter, the environment to which we were
accustomed for a generation. Heidi Shierholz, an economist at the
Economic Policy Institute, notes that if the recovery follows the same
basic path as the last two (in 1991 and 2001), unemployment will stand
at roughly 8 percent in 2014.

"We haven't seen anything like this before: a really deep recession
combined with a really extended period, maybe as much as eight years,
all told, of highly elevated unemployment," Shierholz told me. "We're
about to see a big national experiment on stress."