U.S. Underclass Growing Faster than Employment

U.S. Underclass Growing Faster than Employment

January 7, 2011

Reuters Blog - The U.S. underclass is growing faster than employment. Non-farm payrolls increased 103,000 in December, but the ranks of the long-term unemployed rose by 113,000. True, America’s economic recovery is finally accelerating. But the expanding layer of near-permanently jobless people is bad news for long-term fiscal and social health.

At first sight, the last unemployment figures for 2010 were encouraging. While job creation was mediocre, it was accompanied by a total of 70,000 additional jobs in revisions for the two prior months. And the unemployment rate, based on different data, declined unexpectedly sharply to 9.4 percent.

But that apparently good piece of news is a misleading statistic. The civilian labor force declined by 260,000 as more people exhausted their 99-week unemployment benefits and ceased seeking work. Within that, the number of long-term unemployed increased by more than the number of jobs created. And outside it, the number of discouraged workers, those needing work but ceasing to search for it, rose by 36,000. Both long-term joblessness and discouragement are at their highest levels in at least 50 years.

The Institute for Supply Management indices and other output indicators suggest that the economic recovery has accelerated, perhaps to a level of 4 percent real annual GDP growth. Yet in spite of the 8 million jobs lost in the recent recession, job creation has lagged, averaging only 94,000 a month in 2010 — just a third to a half of the pace seen in the first full year following six previous recessions dating back to the late 1950s.

In their book “This Time is Different,” Carmen Reinhart and Kenneth Rogoff argued that recessions triggered by financial crises are generally deeper and longer than those with other causes. That may explain the relative joblessness of the current recovery. But it also makes the Federal Reserve’s policy of maintaining low interest rates through the last decade — thereby helping to inflate the financial bubble that ended in crisis — look short-sighted.

While the policy reduced unemployment in the short term, the subsequent downturn has enlarged the core of long-term unemployed. Many of them may never find jobs as their skills and motivation atrophy. That in turn will create social problems and become a drain on the welfare system in decades to come.