The real tragedy of persistent unemployment

June's US employment report was disappointing. Though the national unemployment rate fell slightly – it's now at 9.5 per cent from 9.7 per cent in May – the report reveals deep structural problems that go beyond the number of those who remain without jobs, says Mohamed A. El-Erian, CEO and co-CIO of PIMCO, and author of "When Markets Collide."

For example:

  • Almost half of unemployed Americans have been without a job for over six months.

  • The average duration of unemployment, which hit a post-World War II record many months ago, continues to go up; last month it clocked in at 35 weeks.

  • Unemployment is particularly severe among the young: A quarter of Americans between 16 and 19 years old in the labour market are without a job.

    The longer it takes to understand and address these issues, the more likely the United States will get stuck in a protracted low growth/high unemployment trap. In addition to considering the welfare cost of substantial joblessness, policy makers should keep in mind the following four facts, says El-Erian:

  • Persistently high unemployment erodes the skills of any labour force, especially when joblessness is a big problem among the young; this reduces future productivity and growth potential.

  • A high rate of joblessness puts pressure on social safety nets like the unemployment benefit system; it also exacerbates the strain on government budgets already stretched at both the federal and state levels.

  • Stubbornly high unemployment makes those who are employed more cautious; by spending less, they aggravate the economic slowdown.

  • High unemployment has historically induced companies and countries to become more inwardly oriented; many firms have already moved to a "self-insurance" mode, including holding large cash balances rather than investing in equipment and hiring people.

    Put all of this together, and you begin to get a sense of the importance of the employment reports. They are more than indicators of what has happened; they also shed light on what will likely happen going forward. The greater the persistence of high unemployment now, the higher the likelihood that it will drive future behaviour of governments, companies and individuals, says El-Erian.

    Source: Mohamed A. El-Erian, The Real Tragedy of Persistent Unemployment, Wall Street Journal, July 9, 2010.

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    First published by the National Center for Policy Analysis, United States

    FMF Policy Bulletin/ 13 July 2010

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