Unemployment Is Here To Stay

From Forbes |Reihan
Salam,
05.10.10, 01:08 PM EDT

How job hopping and just-in-time employment have
changed the U.S. economy.

Last month's jobs report was a head-scratcher, at least on the
surface. After adding roughly 290,000 jobs, the unemployment
rate actually inched up to 9.9%. The reason is actually fairly
simple. The unemployment rate only captures the number of people who are
active job-seekers. In a deep downturn there are many workers so
discouraged by the state of the labor market that they choose not to
pound the pavement in search of jobs that will never materialize. But
when the economy perks up it's only natural that more of these would-be
workers become active job-seekers. And so the unemployment rate goes up
as the jobs picture brightens.

Does this mean that the U.S.
economy is out of the woods and that our jobless recovery is jobless no
more? I wish that were true. It seems far more likely that we're about
to live through a prolonged period of higher unemployment, unless, that
is, we make serious revisions to the way our welfare
state works. To understand the new employment landscape, consider a little
tweet--that is, a Twitter post--by Jason Calacanis, the famed
Silicon Valley entrepreneur and trendsetting Alpha Geek. "Free advice
for entitled Gen Y trophy kids: If you spend 12 months at a company over
and over you look like a flake."

At first glance this looks like a
grizzled veteran of the tech sector grousing about those lousy kids, and
that's pretty much right. But there is a deeper meaning to Calacanis'
post, which fellow serial entrepreneur and venture capitalist Mark
Suster expanded upon in a post helpfully titled "Never Hire Job
Hoppers. Never. They Make Terrible Employees." And how does one identify
a job hopper? "If you're 30 and have had six jobs since college, you're
98% likely to be a job hopper," Suster writes. "You're probably
disloyal. You don't have staying power. You're in it more for yourself
than your company." Ouch. Of course, Suster and Calacanis are writing
from the perspective of an entrepreneur hiring employees for a startup,
and it's natural that someone in that sensitive position wouldn't want
to hire footloose employees vulnerable to the siren song of a slightly
higher salary at a rival firm.

Startups by nature are small,
intensely collaborative teams that flourish on workaholism that yields
psychic rewards at least as much as monetary rewards. In his brilliant
book Hackers
& Painters, Paul Graham argues that a startup basically
compresses 20 or 30 years of work effort by above-average problem
solvers into a much shorter period of time. The reason most people don't
become entrepreneurs is that most people, including most high
achievers, can't or won't subject themselves to those hours. It goes
without saying that having a job hopper in your midst can make the whole
enterprise crumble. Rather than devote all of your time to working
together to solve a problem, you have a rotten apple looking to cash out
as quickly as possible.

But what does the rarefied world of
startups have to do with the broader economy? Look at the employment
landscape from the perspective of the job hopper. Suster describes the
mentality of Gen Xers, who started their careers in the early 1990s. "We
all lost our jobs through downsizing in the early '90s and we felt
scarred," he explains. "We realized that there was no such thing as
corporate loyalty." In short, job hopping skyrocketed when workers came
to understand the dangers of asset specificity. If you spend your entire
career at DEC or AT&T
(
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people
) and the company goes belly-up, well, you're in bad shape. You
mastered a particular corporate bureaucracy, you built up a tremendous
amount of capital, and then, poof, it's all gone. Job hopping was and
remains a natural defensive reaction. Suster is inclined to blame the
job hopper. Yet one could just as easily blame disloyal firms for
changing the rules.

In continental Europe this kind of asset
specificity is the norm, which is why unemployment compensation tends to be more generous.
Those lucky enough to be employed in good middle-class jobs in, say, Germany are relatively unlikely to lose them, and the
incentives are such that you're inclined to stay in your job for a long
period of time. The financial system is based on close relationships
between bankers and industrialists more than on the fast-moving money
that defines a more arm's-length financial system in which
straightforward metrics like profits matter more than relationships and
money always goes where it will get the best return.

If a banker has a long-standing relationship with the owner of a
midsize firm, she can say, "Sure, profits were low this quarter, but I
know the company is sound and that it'll make a comeback." In an
arm's-length world, in contrast, all you have are raw numbers, free of
sentimentality. Retaining redundant workers through a downturn, hoping
that the economy will pick up steam and you can put them back to good
use, doesn't work in an arm's-length world because it makes your cost
structure look very grim. So should we shift to relationship finance?
The bad news about relationship finance is that it often engenders
corruption and, by definition, a lack of transparency. We can't just
leap from an arm's-length world to a relationship world, not least
because there are pretty serious drawbacks as well as advantages to both
models.

Right now, thanks to LinkedIn and Monster.com and dozens
of other sites that work to match employers and potential employees,
firms can take their time when filling new positions. Manpower
Inc.
(
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people
), the leader in temporary staffing, has mushroomed as employers
choose to hire temps before committing to permanent employees. All of
this means that employers have much more flexibility than they used to,
and they're shifting risk off of their own balance sheets and onto those
of households. Many want to stop this process by, for example,
revitalizing organized labor. But that would involve sacrificing huge
economy-wide gains in efficiency, a very expensive move in a competitive
world.

What we really need is a new social contract, and a
welfare state that is designed to facilitate the attainment of new
skills and the buildup of assets that can help workers weather new
crises. In theory, universal and portable health insurance can do
exactly that but only if it is cost-effective and well-designed. And
that, alas, is not an accurate characterization of the bloated Patient
Protection and Affordable Care Act just passed by Congress. Resolving
the unemployment tangle and building the right institutions for the next
several decades is the thorniest challenge facing our political class.
Unfortunately, they're busy arguing about Elena Kagan and whether or not
we actually have to pay for federal spending. It would be funny if it
weren't so sad.

Reihan Salam is a policy advisor at e21 and a fellow at the New America
Foundation. The co-author of Grand New Party: How Republicans
Can Win the Working Class and Save the American Dream, he writes a
weekly column for Forbes.