A growing political debate over how to revive the job market has its roots in a very basic predicament: Jobs disappeared during the recession on a scale not seen since the 1930s.
Worry about a “jobless recovery” needs to be understood in this context. If employment recovers slowly this time – as it did after the past two US recessions – it would be a much bigger problem than it was following slumps in 1991 or 2001. That’s because there’s a much bigger hole to fill.
More than 5 percent of US jobs have disappeared since the recession began in 2007, some 7 million in all. That compares with job losses in the neighborhood of 1.5 to 2 percent during the previous two recessions.
No wonder there’s a lively discussion in Washington about whether the $787 billion stimulus plan is working and whether new tax credits or other policies could create jobs.
“It’s probably going to be at least as difficult as the prior two jobless recoveries,” says John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C. “It is very, very challenging.”
Not every forecaster believes job growth will be tepid over the next year or two. But the big risk is a worst-of-two-worlds outcome: That massive job losses – the kind last seen decades ago – will be coupled with the kind of lackluster rebound seen in more recent times.
How long to get back to normal?
The goal is not just to get those 7 million jobs back. First, the economy needs to stop losing jobs – a corner that may be turned early next year. By some estimates, the economy must then add about 125,000 jobs a month, or 1.5 million a year, to keep up with the natural rate of growth in the labor force.
What does that mean for getting back near a 5 percent unemployment rate?
Here’s a back-of-the-envelope calculation: If jobs could grow at a mid-1990s pace of 3 million a year, it would take about five years. If jobs grow at a mid-2000s pace of 2 million a year, it would take a lot longer.
In the past, steep job losses have often been followed by strong rebounds in jobs. What’s different today is a historic erosion of household wealth: households amassed record levels of debt in the past decade, and then saw the value of homes and stock portfolios tank.
Against this backdrop, economists say the number of jobs needed is more than the government can afford to engineer.
Consider that in May, the Obama administration gauged the likely impact of its record stimulus package as creating 6.8 million “job years” (one job existing for one year) during the 2009-2012 period. Put differently, the stimulus is expected to generate jobs temporarily, peaking in 2010 at about 3 million jobs for that year.
Lawmakers weigh more fixes
The nation won’t know for a while whether the stimulus will deliver on that estimate. But with the unemployment rate pushing near 10 percent, lawmakers are considering a range of additional policies.
- Extending the first-time homebuyer tax credit, worth up to $8,000.
- Extending unemployment benefits and health benefits for laid-off workers.
- Tax breaks for businesses that hire new employees or spend on new equipment and facilities.
- Additional federal spending on infrastructure, or aid to state governments.
“Under any plausible scenario, the effects of [additional] fiscal stimulus are still likely to fade in the second half of 2010,” Alec Phillips, an economist at Goldman Sachs, wrote in a report Friday assessing these proposals. He said the proposals, depending on their sizes, might increase gross domestic product in 2010 by anywhere from 0.2 to 1.6 percent.
A central concern is whether fiscal stimulus will be effective at a time of high federal deficits, say some experts, since many businesses and consumers will factor in the likelihood of higher taxes down the road.
Republicans in Congress wrote letters this week to Mr. Obama and House Speaker Nancy Pelosi (D) of California, arguing that Democratic policies are hindering instead of helping in the quest for jobs. “Nearly 3 million private sector jobs have been lost in America since the ’stimulus’ was signed into law,” House Republican Leader John Boehner and colleagues said.
What’s unknown, of course, is what the job market would look like without the stimulus. Republicans have proposed their own stimulus measures, centered around tax cuts for businesses and households, and reforms to bring down the cost of health insurance.
Some economists say that it’s possible employment will pick up faster than expected.
Michael Darda of MKM Partners in Greenwich, Conn., argues that fears of a persistently weak “new normal” in the labor market are overblown.
“Large declines in both output and employment tend to give way to more rapid recoveries,” he writes in a recent report. But even a recovery that surprises people for its strength, he said, doesn’t mean a quick return to low unemployment rates of 5 percent.