Washington Goes to Work on Work
Tom Acitelli Nov. 19, 2009, 8:03 p.m.
Faced with rising joblessness and dithering public approval of his administration’s handling of the unemployment situation, President Obama announced last Thursday that he would convene a jobs summit in Washington in December. In explaining the motivation for the forum, the president conveyed that policy makers are “open to any demonstrably good idea to supplement steps we’ve already taken to put Americans back to work.”
Economists expect that a return to job growth will lag behind the end of the recession. For the time being, however, private payrolls are still adjusting to sharply weaker demand than at the economy’s apex, in December 2007. In fact, jobs and hours worked are now being cut faster than output is falling. As a result, accounting measures of U.S. productivity have improved substantially in recent months. According to the Bureau of Labor Statistics’ preliminary report for the third quarter, the business sector’s labor productivity increased at an annualized rate of 9.5 percent. While the benefit of these gains is accruing to businesses, demand for goods and services will ultimately improve to a degree that allows employers to resume their hiring of highly qualified workers.
If history tells us that a recovery in jobs will follow on the current resumption of economic growth, and if the framework for analysis of labor markets supports this conclusion, why convene a summit at all? While conditions in financial markets and the real economy remain fragile and susceptible to shocks, there is a near-surfeit of evidence that the economy has resumed a modest expansion. Similarly, labor market’s headline measures show that job losses have moderated. Initial unemployment claims, for example, have ebbed from a peak of 674,000 in late March of this year to 502,000 claims as of last week. Net job losses have fallen even more, from a peak of 741,000 in January to a preliminary estimate of 190,000 in the preliminary report for October. Extrapolating from the current trend, job losses may turn to modest but sustained gains by the third or fourth quarter of next year.
With this in mind, some observers suggest that the summit is motivated by politics as much as by a conviction that something concrete will result. The appearance of action now, followed by job growth next year, will inevitably lead to intimations of a causal relationship before next November’s midterm elections.
In spite of the improving outlook and the political lucre that may be at stake, the administration’s very real challenge is in the magnitude and duration of job losses to date and in the potential for job growth to be lackluster over the next few years. The most current projections from the Congressional Budget Office anticipate that the unemployment rate will rise to approximately 10.5 percent in early 2010 and will remain nearly twice the natural rate of unemployment until after 2011.
For the interested reader, current research by William Dickens (Brookings, Boston Fed) on the non-accelerating inflation rate of unemployment can be found at http://bit.ly/4st7U9.
October’s job losses, while a fraction of the net decline reported in January, represent the 22nd consecutive month of contraction in payrolls. That statistic was overshadowed by a 40-basis-point rise in the unemployment rate, from 9.8 percent in September to 10.2 percent in October. Having more than doubled since the beginning of the recession, the unemployment rate is now at its highest level since April 1983. According to the household survey, the rolls of unemployed Americans rose by 558,000 over the month, from 15.1 million in September to 15.7 million. As compared to the beginning of the recession, the rolls of unemployed have risen by 8.2 million persons. As is almost invariably the case at this juncture in the economic cycle, it is unclear from where and how quickly these millions of jobs will be replaced.
In pondering what industries will emerge as drivers of renewed prosperity, we can posit any number of options. For example, we might believe that green industries hold the promise of innovation and job growth and that we should invest accordingly to encourage this nascent sector. While there is scant evidence to support this conjecture, the facts do show that unemployed Americans are encountering obstacles in finding new employment that are unusual even during a long recession.
While companies have slowed the pace of job cuts as broader economic conditions have stabilized, few new jobs are being created. As a result, job losers are remaining out of work for longer periods. As of October, the average unemployed person had been out of work for 26.9 weeks, or just over six months. In fact, the average duration of unemployment is now at its highest level since the statistic was first compiled. Prior to the current recession, the peak in average duration of unemployment was 21.2 weeks, in July 1983.
Commercial real estate investors have as much at stake in labor market outcomes as any group. Previous cycles have demonstrated that demand for space depends on jobs. As for whether the administration should deepen its intervention in the labor market and whether it can materially improve upon private outcomes, President Obama has been circumspect in his comments: “We all know there are limits to what government can and should do, even during such difficult times. But we have an obligation to consider every additional and responsible step that we can to encourage and accelerate job creation in this country.”
Through the lens of this dismal science, the administration has a number of plausible options, none of which is mutually exclusive or costless. At the most general level, policies that encourage economic growth should also spur job growth. For practical purposes, however, direct and immediate interventions in support of job creation may require that the federal government increase its own payrolls and scope of activities or that it subsidize employers’ costs in growing private payrolls. Given the ballooning federal deficit and concerns about the government’s expanding presence in hitherto private areas of economic activity, new large-scale subsidies or public works programs may not survive Washington’s political gauntlet without time-consuming debate. If the administration’s goal is to bring Americans back to work sooner, garnering Congressional support for new outlays may not be the path of least resistance.
To accelerate private employers’ hiring plans, reducing the costs associated with immediate payroll growth-by deferring payroll taxes for net new employees, for example-presents some of its own flaws but has the benefit of being recognized in the budget equation’s accounting of receipts instead of outlays. Of course, if the administration fears a structural trend toward more severe chronic unemployment, the jobs summit is just a preamble to the real effort that is called for.
Sam Chandan, Ph.D., is president and chief economist of Real Estate Econometrics and an adjunct professor of real estate at Wharton.