By Mohamed El-Erian
NEWPORT BEACH: It was relegated to the Q&A session, rather than featured prominently in the opening statement, at last week’s first-ever press conference of US Federal Reserve Board Chairman Ben Bernanke. It is an issue that too many in Washington, DC are willing to dismiss as “transitory,” despite visible evidence to the contrary. It is extremely vulnerable to high oil and food prices. And it undermines the operational assumptions that underpin the long-standing characterization of the US economy as vibrant and responsive.
The issue is the scope and composition of unemployment in America — a problem that is yet to be sufficiently recognized for its increasingly detrimental impact on the country’s social fabric, its economic potential, and its already-fragile fiscal position and debt dynamics.
Let us start with the facts:
• At 8.8 percent almost three years after the onset of the global financial crisis, America’s unemployment rate remains stubbornly (and unusually) high;
• Rather than reflecting job creation, much of the improvement in recent months (from 9.8 percent in November last year) is due to workers exiting the labor force, thus driving workforce participation to a multi-year low of 64.2 percent;
• If part-time workers eager to work full time are included, almost one in six workers in America are either under- or unemployed;
• More than six million workers have been unemployed for more than six months, and four million for over a year;
• Unemployment among 16-19 year olds is at a staggering 24 percent;
• With virtually no earned income and dwindling savings, the unemployed are least able to manage the current surge in gasoline and food prices, they are effectively shut off from credit, and many have mortgage debt that exceed the value of their homes.
These and many other facts speak to an unpleasant and unusual reality for the United States. The country now has an unemployment problem that is large in magnitude and increasingly structural in nature. The consequences are multifaceted, involving immediate personal anguish, rising social and political tensions, economic losses, and budgetary pressures.
This is much more than a problem for the here and now. High and intractable unemployment has serious negative long-term consequences that threaten to become exponentially worse. This is a crisis.
Substantial international research shows that the longer one is unemployed, the harder it is to get a job. This erodes an economy’s skills base and saps its long-term productive capacities. And, if unemployment is particularly acute among the young, as is the case today, too many of the unemployed risk becoming unemployable.
Undoubtedly, the Great Recession triggered by the global financial crisis has contributed to this worrisome situation. Unfortunately, the problem is much deeper, as it was long in the making.
At its root, America’s jobs crisis is the result of many years of under-investment in human resources and the social sectors. The education system has lagged the progress made in other countries. Job retraining initiatives have been woefully inadequate. Labor mobility has been declining. And insufficient attention has been devoted to maintaining an adequate social safety net.
These realities were masked by the craziness that characterized America’s pre-2008 “Golden Age” of leverage, credit, and debt entitlement, which fueled a gigantic but unsustainable boom in construction, housing, leisure, and retail. The resulting job creation, though temporary, lulled policymakers into complacency about what was really going on in the labor market. As the boom turned into a prolonged bust, the longer-term inadequacies of the job situation have become visible to all who care to look; and they are alarming.
Left to its own devices, America’s unemployment problem will deepen. This will widen the already-large gap between the country’s haves and have-nots. It will undermine labor’s skills and productivity. It will accentuate the burden imposed on the gradually declining number of people who remain in the labor force and have jobs. And it will make it even harder to find a medium-term solution to America’s worsening public-debt and deficit dynamics.
The US government has little time to waste if it is to avoid an even more protracted and entrenched unemployment problem. It must move now to address the problem’s sources through multi-year programs that range from educational restructuring and worker retraining to productivity enhancement and housing-sector reform. And it must do so while better protecting the long-term unemployed, many of whom bear little responsibility for their current, once unthinkable, and unfortunately long-lasting predicament.
It is past time for the US to wake up and confront in a holistic fashion its unemployment crisis. As everyone who has ever had an unpalatable job knows, shutting off the alarm and pulling the blanket over one’s head is not a solution.
Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of When Markets Collide. This commentary is published by Daily News Egypt in collaboration with Project Syndicate, www.project-syndicate.org.