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4 Million Lost: Here Are the Workers Consumers Can't Rescue

Economists say that more spending will create jobs, but it could be a decade or more before some key sectors hire back the workers they've cut

Economists say that more spending will create jobs, but it could be a decade or more before some key sectors hire back the workers they've cut

600 consumers shopping REUTERS Kevin Lamarque.jpg

In June 2009, the U.S. unemployment rate was 9.5%. In June 2010, it was 9.5%. In June 2011, it was 9.2%. That's it? In two years, the unemployment rate has fallen by just 0.3%? If it falls by that amount each year, we won't see unemployment dip below 6% for over a decade. And that ignores the millions of unemployed Americans not even accounted for in the official statistic for technical reasons. Why is hiring so slow?

At this point, we know that the unemployment problem is unyielding. Although we've heard lots of ideas for ways to try to create jobs, even the best ones would have a modest short-term impact. A few hundred thousand jobs here or there would be great, but they aren't going to get us back to full employment anytime soon. The U.S. needs about 6 million jobs just to get the unemployment rate back to near 6% -- not including the 125,000 or so new jobs needed each month just to maintain the current unemployment rate. In 2011, the economy is averaging just 126,000 new jobs per month.

Most economists agree that for unemployment to decline significantly, consumer demand must rise. As sales increase, firms will need to hire additional workers. But even if demand soars, unemployment won't suddenly plummet.

You can see why by looking at the actual job losses from the sectors that have shrunk since the recession began. The chart below breaks down the 6.1 million job losses since September 2008, when the unemployment rate was just 6.2%.

sector job losses pie 2011-06.png

For starters, you can see that nearly half of the job losses, amounting to more than 3 million, came from two industries: construction and manufacturing. Adding in retail, government, and financial activities accounts for another 25%. The job losses are highly concentrated in a couple of select industries.

And here's another way to look at this data:

sector job losses schedule 2011-06.png

The color-coding here matters.

In Pink: Structural, Long-Term Problems

Those in pink are industries where employment won't reach its post-recession levels for probably a decade or more. Too much building occurred during the real estate bubble. Even when construction does pick up again, the sector won't employ nearly as many people as it did during the boom. The government job losses shown are all due to state and local public sector job cuts. With the nation facing austerity over the next decade or more, government budgets will only tighten. Finally, stricter financial regulation will likely result in fewer financial jobs over the next several years or slower growth at best.

In other words, we're not going to see the 2.5 million jobs lost by these sectors return for a very long time, if ever. To find employment, most Americans laid off in these industries need to change careers. This is a structural problem.

In Orange: Pseudo-structural, Medium-term Problems

The news is only a little better for the next two sectors, in orange. The theory goes: as demand returns, more manufacturing and retail jobs should follow. These two sectors together account for another 2 million jobs losses, so their improvement would certainly help. But here's the problem: demand has returned. Inflation-adjusted consumer spending was 3% higher in May 2011 than in September 2008, according to the Bureau of Economic Analysis. Americans are buying even more stuff now than they were when unemployment was 6.2%.

Two possibilities could explain what's going on here. One is that firms have realized that workers could be more productive, so fewer employees are managing to provide enough output to satisfy the stronger demand for goods and services. The other is that firms have outsourced some jobs, particularly in the case of manufacturing. In both cases, companies aren't going to suddenly hire aggressively as demand grows.

If you look deeper into the retail job losses, you find something more troubling: the sector's problem actually begins to look structural. Of its 535,000 job cuts, 334,000 or 62% are related to autos, building materials, or furniture sales. We shouldn't expect to see any of those retail sectors experience sudden growth anytime soon.

In Green: Cyclical, Short-term Problems

That leaves the other five sectors, in green. These are industries that likely cut jobs mostly due to the usual recessionary cycle. The good news here is that these industries should begin to experience job growth at a moderate pace as demand continues to pick up. The bad news, however, is that these five sectors combined account for less than 1.5 million of the jobs lost during the recession. That's less than a quarter of the 6.1 million.

So let's say that all 1.5 million of these five sectors' jobs come back relatively quickly, over the course of two years. Assuming that discouraged workers also re-enter the workforce over that time, the unemployment rate would only decline to 8.1%. And that assumes that the economy is also adding the 125,000 or so jobs necessary each month to account for population growth -- over and above the 1.5 million that these sectors might provide.

Spending Alone Won't Solve the Long-term Unemployment Problem

Of course, we'll also see some very slow job growth in those sectors with the pseudo-structural problem (orange). We just have to hope that those new jobs aren't overshadowed by additional losses in the industries with the structural problem (pink). Stronger demand, while helpful, isn't a panacea. Americans can't spend their way out of this mess.

The problem here goes deeper. In order for most of the unemployed Americans to find jobs, we're going to need more training so that they can find careers in different industries that are more likely to grow in the years that follow. And unfortunately, training isn't a quick fix. Many of the careers in promising sectors will require at least a few years of training/education. And that assumes that these individuals have the will, foresight, and resources to seek that training.

So what did the U.S. do wrong to get here? For one thing, it invested an incredible amount of human capital and money in a gigantic real estate bubble. But it also failed to develop a long-term manufacturing strategy. If the nation hopes to continue to maintain a significant presence in that industry, it must focus on corners of the sector where U.S. workers can create products better and more cheaply than its global competitors. Any training in sub-sectors of manufacturing that are more effectively outsourced was time wasted.

These mistakes have left the nation with millions of adults whose skills and experience won't fit the employment opportunities that will arise over the next several years. That makes the road ahead very tough for these Americans. Until unemployment falls to its natural rate, the U.S. cannot be said to have returned to widespread economic prosperity.