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Key challenge for Obama remains the long-term jobless

By Vivien Lou Chen
Bloomberg News / September 7, 2011

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President Obama, under pressure from Republican lawmakers and constituents to reduce the highest jobless levels in more than a quarter century, faces a more persistent, underlying challenge: long-term unemployment.

He will lay out his plans in a speech tomorrow to help bring down a jobless rate stuck around 9 percent or higher since April 2009. One hurdle is finding employment for people who have been out of work more than half a year as their ranks swell to the largest since the Great Depression.

“He needs to come up with a plan that is doable and gets passed by Congress,” said John Silvia, chief economist of Wells Fargo Securities LLC in Charlotte, North Carolina. “An unemployment rate of 9 percent has been associated with not getting re-elected” and “it’s going to be difficult for him to overcome that.”

Ronald Reagan is the only US president since World War II to win re-election with a jobless rate above 6 percent. Obama’s approval rating was 43 percent in a Sept. 2-4 Gallup daily poll, down from 68 percent in January 2009 during his first three days in office; 50 percent disapproved of the job he’s doing.

“Part of it’s not his fault,” Jim Glassman, a senior economist at JPMorgan Chase & Co. in New York, said of Obama. Still, “it’s counterproductive for him to blame the past.” If his message is “going to be on revving economic growth up, making things easier for businesses, lightening the tax burden on businesses, you’d be surprised at how favorable the response would be.”

‘No Mystery’

“There’s no mystery in the jobs situation,” Glassman added. “Companies won’t hire unless they have a reason if they don’t have the business.”

The dilemma for Obama is developing policy responses for a problem that some economists, including Silvia and researchers at the Federal Reserve Bank of Richmond in Virginia, say is rooted in hard-to-fix, structural forces such as increased global competition and people’s lack of the right skills. Any solutions likely will need to “increase the ability and willingness of the unemployed to find work,” Richmond Fed researcher Thomas A. Lubik said in a Sept. 2 telephone interview.

Unlike recessions of the previous century, the 18-month contraction that began with the collapse of the subprime- mortgage market in 2007 and ended in June 2009 hit employees in almost every industry with equal force.

Sustained Decline

It also produced the first sustained decline on record of the employed labor force, which fell to 139.6 million last month from about 145 million in August 2008, reflecting a larger number of people who have given up on looking for work.

The share of long-term unemployed as a percentage of overall joblessness peaked at 46 percent in May 2010 in the aftermath of the recession and has remained stalled at or above 42 percent every month since March 2010. That compares with the historical average of 15 percent from 1960 to 2010 and a previous peak of 26 percent set in June 1983 following the 1981- 1982 slump, according to Lubik, a senior economist, and Andreas Hornstein, a Richmond Fed vice president, who have studied the shift.

With about a third of all unemployed out of work for more than a year, “the past offers some dismal prospects for the near-term future,” Hornstein said in the telephone interview. “Saying that what we are experiencing now is just another jobless recovery looks like an understatement.”

Moved in Lockstep

For much of the past 50 years, the percentage of people out of work for at least 27 weeks moved in lockstep with the overall unemployment rate, according to data from the Bureau of Labor Statistics, Haver Analytics and calculations by Hornstein and Lubik. That correlation began to change in the 1990s, when the ranks of the chronically unemployed began to fall more slowly during recoveries, the Richmond Fed researchers said.

A primary cause of the shift is a decline in the so-called exit rate, or rate at which someone without a job returns to work, Hornstein and Lubik said. The odds of finding a job within a month of becoming unemployed during recessions have dropped to 20 percent from more than 40 percent in 2000, they concluded in a brief this month.

One reason is globalization, beginning with the acceptance of Japanese vehicles in the U.S. and then propelled by the North American Free Trade Agreement in 1994 and China’s entry into the World Trade Organization in 2001, according to Silvia.

Improving Productivity

Improving productivity among US companies, along with a greater use of capital and technology, also has led to a reduced need for labor in industries that were traditionally accustomed to less competition, he said.

Another component is the collapse of housing prices that began in 2006 and 2007. This has made it harder for property owners to move to areas with new opportunities, contributing to higher levels of structural unemployment, Silvia said.

A revival in building helped spur previous recoveries, typically contributing as much as 0.75 percentage point to growth of gross domestic product adjusted for inflation, Glassman said. Construction, which accounted for as much as 5.7 percent of payrolls in 2006, now has fallen to 4.2 percent.

The industry remains “dormant,” Glassman said. “Builders put up too many houses during the real-estate speculation of the last decade and we need time to absorb this.”

The economy lost a total of 512,000 payroll jobs in the year after the recession ended, according to Bloomberg calculations based on Labor Department data. That compares with 239,000 in the 12 months after the July 1990-March 1991 contraction and 562,000 in the year following the March 2001- November 2001 slump.

Net Zero Growth

Employment unexpectedly stagnated in August, producing a net payroll growth of zero, the first time that’s happened since February 1945. The jobless rate stayed at 9.1 percent, according to data from the Labor Department released Sept. 2.

“What is different this time is the recession has been much deeper than the previous two,” Lubik said. “We still think this recovery is likely to be another jobless recovery, but on a much larger scale. The unemployment rate and share of long-term unemployment are going to come down very, very slowly.”

Fed officials have tried to spur growth by holding the target for the U.S. benchmark interest rate near zero since December 2008 and are pledging to keep it there through at least mid-2013. They’ve also expanded the central bank’s balance sheet to more than $2.8 trillion. Meanwhile, Fed researchers have said they are focused on determining how much of the elevated unemployment rate is amenable to further central-bank actions.

Role of Congress

With Lubik and Hornstein concluding structural forces have caused a large share of the increase in long-term joblessness, “this would require labor-market policies that the Fed can’t do anything about,” Lubik said. “That would have to be the role of Congress.”

Obama is scheduled to appear before a joint session of the House and Senate tomorrow, with a plan to spark job growth by injecting more than $300 billion into the economy next year, mostly through tax cuts, infrastructure spending and direct aid to state and local governments, according to people familiar with the administration’s deliberations. Republicans, who control the U.S. House, have signaled resistance to new spending that would add to the federal budget deficit.

Lisa Epperson, a 32-year-old mother of two from Dallas, said she has sent out more than 400 resumes since January, when she was laid off from a part-time job paying $9 an hour as a Levy Restaurants cashier.

Job Applications

She’s applied to fast-food chain McDonald’s Corp. three or four times and, as a former certified nursing assistant and dietary aide, also has tried the Methodist Health System.

While she’s gotten one or two calls back for interviews in the past month, Epperson said none led to work. Now she’s in the process of obtaining two online degrees from the University of Phoenix in psychology.

“I’m a little frustrated,” Epperson said. “I feel like the older you get, the harder it becomes for you to get a job. I’m not getting my chance even though I’m going back to school, so I don’t know what the future is going to hold for everybody else. Personally I think Obama is doing the best he can. I really don’t know if there’s anything he can say that will help.”

With assistance from Margaret Talev in Washington. Editors: Melinda Grenier, Gail DeGeorge