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News : International Last Updated: May 12, 2010 - 5:14:54 AM


US economic recovery is building momentum; Daunting challenge of the so-called "job gap"
By Michael Hennigan, Founder and editor of Finfacts
May 11, 2010 - 6:09:40 AM

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President Barack Obama and Vice President Joe Biden applaud as Solicitor General Elena Kagan moves to the podium after the President announced her as his choice for Supreme Court Justice during an event in the East Room of the White House, May 10, 2010.

The US economic recovery is building momentum and won't be derailed by the impact of  financial turmoil in Europe or by high debt levels at home, says Jim O'Sullivan, chief economist for US broker, MF Global. Meanwhile, the welcome return to jobs growth has also highlighted the daunting challenge of the so-called "job gap" according to Massachusetts Institute of Technology (MIT) professor, Michael Greenstone.

The US economy is strengthening month by month. "Growth is coming in better than expected," O'Sullivan said, "consistent with enough upward momentum to more than offset the impact of the turmoil" in Europe. Despite the headwinds from budget constraints at state and local governments, the reluctance of banks to lend and the lingering weakness in commercial real estate, "the odds are heavily stacked for solid growth," O'Sullivan said. He sees the economy growing about 3.5% to 4% annually, stronger than the tepid recoveries following the 1991 and 2001 recessions, but underperforming the 6% recoveries in the 1960s, 1970s and 1980s.

The economist is the winner of MarketWatch's Forecaster of the Month award for April. MarketWatch says he's been in the winner's circle seven times now, putting him in a tie with economist Stephen Stanley for most victories in the six-year history of the contest. The first six awards came when he worked for UBS Securities.

Prof. Michael Greenstone says while  there is reason to celebrate last Friday's encouraging news that 290,000 jobs were added in the US economy in April, the underlying "job gap" implicit in the numbers remains daunting, with too many Americans still struggling to find jobs. In fact, a staggering 6.7 million Americans have been unemployed longer than 27 weeks. The job gap, as he envisions it, is the number of jobs it would take to return to employment levels from before the Great Recession, while also accounting for the 125,000 people who enter the labour force in a typical month. After Friday's employment numbers, the job gap stands at roughly 11.3 million jobs.

He asks how long will it take to erase this job gap? If future job growth continues at a growth rate of roughly 250,000 jobs per month, slightly below the average job growth over the last two months, he says it would take seven-and-a-half years. In a more optimistic scenario, with 350,000 jobs created per month, it would take more than four years or until the middle of 2014.

Prof. Greenstone says beyond the cyclical unemployment generated by the recession, the US economy also faces substantial structural unemployment problems. In a recent paper written for The Hamilton Project and the Center for American Progress, David Autor, a colleague of Greenstone's at MIT, outlines many of these structural challenges. Autor’s paper, which he presented at a joint conference on The Future of American Jobs in April, highlights the following trends:

  • The earnings of college-educated workers relative to high school-educated workers have risen steadily for almost three decades.
  • The rise in the relative earnings of college graduates is due both to rising real earnings for college-educated workers and falling real earnings for non college-educated workers, particularly non college-educated males. The declining real earnings for workers with less than a college degree has also led to declining rates of labour force participation for them.
  • Gains in educational attainment have not generally kept pace with rising educational returns, particularly for males. And the slowing pace of educational attainment has contributed to the rising college/high school earnings gap.
  • Employment losses during the recent recession were far more severe in middle-skill white- and blue-collar jobs than in either high-skill, white-collar jobs or in low-skill service occupations. As a result, the Great Recession quantitatively but not qualitatively changed the trend toward employment polarization in the US labour market.

Last week, Finfacts reported that Alan Krueger, Assistant Secretary for Economic Policy and Chief Economist of the U S Department of the Treasury in testimony to the Joint Economic Committee of the US Congress, said the US jobs market underperformed the Eurozone and other economies in the decade before the Great Recession.

Brookings Institution economist Gary Burtless, commented on Monday that longtime job seekers now represent 46% of the unemployed, an astonishingly high percentage. To put this number in perspective, in previous recessions the peak fraction of unemployed who have been unemployed longer than six months is rarely more than one-quarter of the unemployed. In the worst post-war recession, which occurred in President Reagan’s first term, the percentage of unemployed workers jobless longer than six months reached a peak of less than 26%.

Compared with other rich countries the United States has a good record of keeping average unemployment spells brief. Among the 21 wealthiest OECD countries, only Canada, New Zealand, and Norway had a smaller percentage of long-term unemployed in their jobless populations in 2008. In that year only about 20% of unemployed workers in the United States had been jobless for 6 months or longer. In Europe the comparable percentage was about 55%. Part of the US success in holding down unemployment durations is traceable to meagre social protection for the long-term unemployed. In ordinary times Americans qualify for a maximum of 6 months of unemployment benefits. This benefit limit is shorter than the limit in other rich countries. When regular unemployment insurance comes to an end, social protection for America’s long-term unemployed is quite low compared with what is available elsewhere.

Burtless says in the current recession Congress has temporarily extended and improved unemployment benefits. At the moment there are many more unemployed workers who do not qualify for unemployment benefits than there are new job openings. Even if an unemployment insurance recipient turns down a job opening, there are many other job seekers (with and without unemployment benefits) who are eager to take the job.

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