Long-Term Unemployed Still a Fly in Recovery Ointment

The U.S. labor market is slowly healing. Much of the recent data point in that direction -- but the scars of this financial crisis run deep.

Nowhere are those scars more visible than in the area of long-term unemployment.

“There’s an egregious problem with long-term unemployment in this cycle that’s going to take some time and maybe some policy action to correct,” said Cliff Waldman, an economist for the Manufacturers Alliance/MAPI, a public policy organization in Arlington, Va.

The number of Americans who’ve been out of work for 27 weeks or more, the government’s definition for long-term unemployment, soared after the financial meltdown in the fall of 2008. According to a recent study by RBC Global Management, the number approached 7 million during the peak of the financial crisis in 2009, up from about 1 million two years earlier, and has fallen only slightly from that high-water mark in the three years since.

“There’s an egregious problem with long-term unemployment in this cycle..."

- Cliff Waldman, the Manufacturers Alliance/MAPI

What’s more, the recession brought on by the collapse of the U.S. housing market was so deep and so pervasive that the average length of unemployment has jumped to 40 weeks from 16 weeks prior to the onset of the crisis.

Meanwhile, the U.S. Labor Department reported Friday that employers added 227,000 jobs in February, the third straight month of solid growth, and the overall unemployment rate has fallen to 8.3%. That’s down from a financial-crisis high of 10% in October 2009. In addition, weekly initial jobless claims have consistently fallen to their lowest levels in four years.

Some economists believe that, while the data have certainly been encouraging, it’s more a reflection of a return to stability after a time of severe upheaval rather than an unambiguous sign of sustained strength.

The full-blown recovery that many had predicted for last year has been delayed until at least the second half of 2012. A perfect storm of unforeseen difficulties in 2011 -- the Japanese tsunami, the Middle East democracy protests, Congressional squabbles in the U.S., and the European debt crisis -- provided no relief to the long-dormant U.S. labor and housing markets.

The landscape seems to be improving in 2012.

Friday’s jobs report was a far cry from last August, when not a single job was created in the U.S. But it’s well below the range of 300,000 to 350,000 new jobs widely believed needed each month to spark a significant recovery in labor markets.

Waldman believes the damage may be “structural,” meaning the problems may not fix themselves on their own as the economy organically recovers over time.

Here’s the problem: while thousands of jobs cut during the recession are returning now that the recovery is gaining momentum and demand for goods has picked up, many of those jobs aren’t being filled as quickly as they should be because employers have raised their requirements.

With the labor market as tight as it is, employers can afford to be more selective, raising their qualifications for experience and education. At the same time, many companies have learned to do more with less, eliminating marginal positions and focusing only on the necessary ones.

This is especially true in the manufacturing sector, according to Waldman.

Manufacturing is no longer a low-tech industry in the U.S. Instead, many positions require knowledge of and experience with sophisticated machinery and the computer networks that run that machinery. These jobs often require some higher education if not an actual college degree.

Eric Lascelles, the author of the RBC Global Management report, noted the growing disparity between the jobs likely to be created during the fledgling recovery and the large pool of unemployed.

The U.S., he said, “is experiencing an acute skills mismatch.” In particular, workers laid off from the manufacturing and construction sectors will face a number of significant obstacles to re-entering the workforce. Factory workers in manufacturing for the reasons stated above, and construction workers because that sector was impacted (far) more than any other by the building boom that coincided with the inflation of the U.S. housing bubble. 

“Pre-crunch construction employment constituted a bubble, and even an unlikely return to normal construction levels would leave a deficit of over one million construction workers permanently out of work,” Lascelles explained.

Equally troubling for the millions of long-term unemployed is the almost unavoidable erosion of their skills during the forced layoff.

“The longer the bout of unemployment, the more that existing skills atrophy and cutting edge techniques go unacquired,” Lascelles added. “The prospect of re-employment dips and attachment to the labor market weakens. If a new job is eventually found, it is frequently a worse fit than the old one.”

Compounding the problem even further is many workers’ inability to relocate for better employment opportunities because they can’t sell their home. The collapse of the housing market has slashed the value of millions of U.S. homes to such an extent that those homes are now worth less than the mortgage owed by the homeowner.

These people cannot sell their homes without taking substantial losses, leaving them stuck where they are, often jobless and deeply in debt.

So, the problem won’t easily be fixed. Government assistance to aid the long-term unemployed, likely in the form of tax incentives or re-training grants to private sector businesses, will be a hard sell in the current environment of austerity.