Samuelson: Why High Unemployment Will Continue

The first Labor Day, held in New York City in 1882, was less a celebration of the dignity of work than a demonstration in favor of the eight-hour day, down from the prevailing 10 to 12 hours. Compared with then, American workers have come a long way. Congress made Labor Day a national holiday in 1894, and over the years, it evolved into a day off rather than a moment to reflect on the state of labor, broadly defined and extending beyond unions. Well, not this year.

It's the bleakest Labor Day since at least the 1980s (unemployment: 10.1 percent in September 1982). With the unemployment rate at 9.7 percent in August and expected to go higher, cheery news is scarce. The Economic Policy Institute (EPI), a liberal think tank, has painted a statistical portrait of today's labor market. Here are some lowlights:

• Since the recession's start in December 2007, the number of lost payroll jobs totals 6.9 million. A third of today's jobless have been unemployed more than six months, almost double the share of a year ago and a post–World War II high.

• Wage growth has slowed dramatically. In the first half of 2007, all private wages and salaries rose at an annual rate of 3.7 percent; in the first half of 2009, the increase was 1.3 percent.

• The unemployment and "underemployment" rate is 16.8 percent—that includes the officially unemployed and part-time workers who'd prefer a full-time job, as well as discouraged job seekers who have stopped the hunt for work.

Job anxiety has also increased sharply, according to opinion surveys compiled by Karlyn Bowman of the conservative American Enterprise Institute. A Gallup poll in August found that 31 percent of workers worried about being laid off, up from 15 percent a year earlier; 32 percent thought their wages might be cut, up from 16 percent; and 46 percent feared fringe benefits might be reduced, up from 27 percent.

What's most ominous is not today's job market; it's the outlook. After the 1981–82 recession, unemployment dropped steadily, from an annual average of 9.7 percent in 1982 to 7.5 percent in 1984 and 5.5 percent in 1988. The descent this time is expected to be much slower. In 2014 the unemployment rate will still average 7.6 percent, forecasts IHS Global Insight, which predicts a peak of 10 percent early next year. Reducing unemployment requires an economic expansion fast enough to absorb today's jobless as well as the natural growth of the labor force. Most forecasters expect a tepid recovery that will only gradually dent unemployment, despite slowing labor-force growth.

"The 1982 recession was largely caused by the desire to break the back of inflation," says economist Nigel Gault of IHS. "Once the [Federal Reserve] was comfortable it had broken inflation, it lowered interest rates, and economic growth took off." Interest-sensitive sectors—autos and housing—propelled recovery. By contrast, today's slump results from the financial crisis, Gault says. The Fed has already cut interest rates, which will probably go up. As overborrowed households repay debt, their spending will be sluggish. The weak recovery then retards new jobs.

The implications of prolonged high unemployment—should it materialize—haven't been fully explored. People who don't have jobs don't acquire skills. Young college graduates are already having trouble getting work. High unemployment could depress wage gains for years. It could foster protectionism and long-term poverty. "In a tight economy like the late 1990s, firms are more willing to take chances on more disadvantaged workers," says Harvard economist Larry Katz. EPI's Lawrence Mishel thinks the effects on low-income families would be devastating; the child poverty rate could jump from 18 percent in 2007 to 27 percent.

Of course, today's bleak economic forecasts could be wrong—just as upbeat forecasts before the financial crisis were wrong. Some economists are warming to this view. "Global manufacturers cut output too deeply," says David Hensley of JPMorgan Chase. "People thought we might be headed into another depression." Here and abroad, he says, companies are reversing previous cutbacks. "Businesses overshot. They'll snap back [in hiring]; that will fuel consumer spending." One good omen: in August the number of job openings online rose 5 percent, reports the Conference Board.

Job creation has been a historic strength of the American economy. Its capacity to remain so will increasingly frame the economic debate: between those who want more government and those who want less; between those who fear budget deficits and those who favor more economic "stimulus"; between those who see meager wage gains as impeding recovery and those who see them as encouraging hiring. On Labor Day 2009, future jobs are the gigantic question mark hanging over the American economy.

Samuelson is the author of The Great Inflation and its Aftermath.