Permanent Job Losses and False Perceptions of Their Consequences

Catherine Rampell, writing for The New York Time’s Economix blog on January 28, ably describes how the “Great Recession” will affect the employment situation for millions of Americans. Basically, many of the jobs lost will be lost for good:

Lots of the bloodletting we’ve seen in the labor market has probably been permanent, not just cyclical. Many employers have taken Rahm Emanuel’s famed advice — never waste a crisis — to heart, and have used this recession as an excuse to make layoffs that they would have eventually done anyway. Some economists refer to this as the “cleansing effect” of recessions. …

Over all, the share of unemployed workers whose previous job has been permanently lost tends to rise during recessions, and the share of the unemployed who are just on temporary layoff falls.

This is shown in a Bureau of Labor Statistics chart (displayed in Rampell’s post), showing that most of the gains in unemployment over the past two years is not due to increases in temporary layoffs, which initially may thought to be the primary cause within a recession:

Source: Bureau of Labor Statistics and New York Times

This trend is much more pronounced in this recession than in past recessions. A recent Congresional Budget Office report states:

Third, the movement of unemployed workers into new jobs will probably be more difficult in this recovery than in past ones. Recessions often accelerate the demise or shrinkage of less efficient and less profitable firms, espe- cially those in declining industries and sectors. Thus, the share of unemployed workers whose previous job is per- manently lost tends to rise during recessions; the rise has been especially pronounced during the past two years. At the same time, workers on temporary layoff represent a smaller percentage of the unemployed than they did in past recessions.

As a result, gains in employment after this recession will probably rely more than usual on the creation of new jobs, possibly in new firms that are located in different places and require workers with different skills than those needed in the jobs that have disappeared. For workers who have lost jobs because of a permanent layoff, the pro- cess of acquiring new skills can take time. (In contrast, it is easier for workers who have been laid off temporarily to return to their jobs because the employers already know the workers and the workers already have the right skills and are familiar with the work practices at the job.) For workers who need to move to different geographic regions to find new jobs, the sharp declines in home prices during this recession, combined with the high loan-to-value ratios on many mortgages before the down- turn, will hinder relocation. With a significant share of homeowners now owing more on their mortgages than their homes are worth, many people may not be able to sell their house for enough money to enable them to buy one in a new area.

What should we make out of all of this? If we look to the past, it is obvious that we have gone through major economic transitions before. While they are no doubt difficult in the short run, in the long run they facilitate a much stronger economy with greater opportunities for economic growth. For example, the United States has experienced a long and steady decline in rural employment, especially on farms. Even within the past 30 years, much has changed. Rural poverty rates remain higher than urban poverty rates, and the majority of farmers do not farm as their primary occupation. The percent of Americans living in rural areas decreased from 20-percent in 1980 to 16-percent today.

Despite this drastic change in what appeared to be the fundamental fabric of America, life continued. The world did not come crashing down and the middle class continued to expand. According to the U.S. Census Bureau, in 1970, the mean household for the middle fifth of households was $42,996 (2008 Dollars). In 2008, it was $50,132. Similarly, the average individual income in 1970 was $15,721 (2008 Dollars). In 2008, it was $26,964. Despite what seemed like a disaster at the time, economic growth continued to occur for all types of people throughout the United States. The same will continue into the future. No doubt policies will be different, types of jobs will change, and greater demands will be placed on workers, but life will go on, and for the better.

Note: This post is mirrored in the Chicago Policy Review blog, for whom I also write.