Without a job for seven months, the 48-year-old computer- network administrator said she’s stopped dining out, cut back cable-television services and put off paying a photography class bill from her 14-year-old son’s school in Monrovia, California. She is among more than 4 million Americans who have been looking for work for more than 26 weeks, representing 29 percent of the unemployed, the most since records began in 1948.
Hundreds of thousands of lost jobs in industries such as autos and construction haven’t been replaced with new ones, shrinking payrolls by 6.5 million since the recession began in 2007, Labor Department figures show. The June jobless rate reached 9.5 percent, the highest since 1983.
“We are going to have a huge pool of unemployed, second only to the Great Depression,” said Allen Sinai, chief economist at Decision Economics in New York. “It will be a big public-policy problem.”
The Standard & Poor’s 500 Index has slumped about 4 percent since government figures published July 2 showed a 467,000 drop in June payrolls, more than economists had forecast. Ten-year Treasury yields have fallen, as investors bet the sluggish job market will lead the Federal Reserve to keep interest rates near zero.
President Barack Obama tried to tackle prolonged joblessness in the $787 billion stimulus package Congress passed in February by lengthening and expanding aid to the unemployed.
Benefits Run Out
As many as 650,000 workers may exhaust even their extended benefits within three months, said Maurice Emsellem, policy co- director for the National Employment Law Project, a nonprofit advocacy group headquartered in New York.
That means Obama may need to aim directly at reducing joblessness, said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. Among options: enhanced job training, tax credits for businesses that take on new employees or a temporary cut in payroll taxes.
The U.S. traditionally hasn’t had to deal with long-term joblessness. During the last 30 years, Americans who were thrown out of work took an average 15.8 weeks to find new positions. In June, the average duration of unemployment was 24.5 weeks, the longest since records began in 1948. The number of people collecting unemployment benefits reached a record 6.88 million in the week ended June 27.
Peak Unemployment
While unemployment will peak between 10.5 percent and 11 percent in the U.S., it will remain high and stay above 7 percent, said Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., manager of the world’s largest bond fund.
“The United States right now is in transition,” El-Erian said in an interview from Pimco headquarters in Newport Beach, California. “It’s coming out of one regime. It’s on this bumpy and painful journey to what we’ve called here the new normal.”
Alan Blinder, the former Fed vice chairman who is now an economics professor at Princeton University, isn’t as pessimistic as El-Erian about the economic outlook. He says he sees the jobless rate peaking at 10 percent or a little higher in the first half of next year, then gradually coming down.
The proportion of unemployed workers who have permanently lost their jobs -- as opposed to those on temporary layoff -- reached a record 53.5 percent in June, government figures show. About six people are seeking work for every job opening, the most since the government began keeping such records in 2000. A year ago, the ratio was a little more than two-to-one.
‘Plain Depressing’
“Being out of work for three weeks is very different from being out of work for 30 weeks,” said Dirk van Dijk, director of research for Zacks Investment Research Inc. in Chicago. “It is a very scary prospect. Economically it further depresses your spending and psychologically it is just plain depressing.”
A measure of consumer sentiment fell in July to the lowest level since March, as mounting job losses undermined confidence. The Reuters/University of Michigan index slid to 64.6, less than forecast, from 70.8 in June, a report today showed.
The average American is ill-prepared for a lengthy spell of unemployment, said van Dijk. Households reduced their savings in the last expansion -- putting aside less than 1 percent of disposable income in 2005-2006, compared with an average 6 percent the previous 30 years -- and thus didn’t have much in reserve.
Savings Gone
“I don’t have any more savings,” said Alvarez, who is drawing jobless benefits and “trying to avoid” taking other government assistance. “I’m down to living on $200 a week.”
Home-equity borrowing is no longer an option for many families. House prices are down about 25 percent from their 2006 peak, according to the National Association of Realtors in Washington. And banks, stung by $1.5 trillion of writedowns and credit losses since 2007, are getting stingier. The Federal Reserve’s latest quarterly survey of senior loan officers showed about 65 percent of banks lowered credit-card limits.
Even the highly educated are finding it tough to get work. Washington resident Alexandra Moller, 34, who holds a law degree and two master’s degrees, has been unemployed since September. She’s searching for a position with the federal government or a nonprofit organization.
The most frustrating part is “the constant refrain that it’s such a hard time to find something,” she said. “It adds to a certain resignation that it’s going to take a long time.”
Lowered Expectations
The surfeit of job seekers is forcing people to lower their salary expectations. Liz Mandel, who lost her job in January as a senior clinical-data manager at a biopharmaceutical company, said she has had to look for positions that pay about $15 less an hour than what she earned before.
“I absolutely, definitely feel anxious,” said the 42- year-old San Francisco resident.
Earnings per hour for production workers climbed at a 0.7 percent annual pace in the second quarter, the least since records began in 1964, according to government figures.
That’s putting a squeeze on spending, even for essentials. A national poll of unemployed workers conducted in November by Peter D. Hart Research Associates in Washington for the National Employment Law Project found that more than two-thirds had cut back on food expenditures.
Long-term joblessness is also a “profound problem” for housing, said Paul Willen, senior economist at the Boston Fed.
“If a person becomes unemployed, they’re going to start missing mortgage payments,” he said. “The main exit strategy for a troubled borrower is another job. At this time, it’s extremely hard to find one.”
Mortgage Delinquencies
Mortgage delinquencies rose to a record in the first quarter, and about one in every eight Americans is now late on a payment or already in foreclosure, according to the Washington- based Mortgage Bankers Association.
Unemployment also has “immense social costs,” said JoAnn Prause, senior lecturer at the University of California in Irvine’s Department of Psychology and Social Behavior. “Bouts of unemployment have been associated with increases in depression, reduced self-esteem, and increases in alcohol abuse,” she said.
That’s prompting calls for added stimulus.
“We’re going to need more medicine,” Warren Buffett, chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc., said in a June 24 interview. “We’re going to have more unemployment.”
Worker Training
Besides beefing up jobless benefits, economists are calling for more training and education programs, tax changes and government support for corporate investment.
Obama’s original stimulus package provided $3.95 billion for training, including $750 million in grants to prepare and place workers in jobs in high-growth and emerging industries.
Senators Sherrod Brown, an Ohio Democrat, and Olympia Snowe, a Maine Republican, proposed legislation to pair companies offering new jobs with workers seeking specialized skills.
The bill would “allow local people to come up with what they need to train workers,” Brown told a New America Foundation conference in Washington on June 24.
Sinai, of Decision Economics, wants Obama to reconsider providing tax credits to companies that take on more workers. Before becoming president, Obama proposed offering a $3,000 tax credit for each new-hire.
Douglas Holtz-Eakin, an economic adviser to Arizona Republican Senator John McCain’s presidential campaign, said a temporary payroll-tax cut would do more to create jobs.
Support for Investment
Government support for investment is the preferred option of Nobel Prize-winning economist Edmund Phelps. One possibility, the Columbia University professor said, is a government- sponsored financing program for industry akin to that available to farmers through the Federal Farm Credit Banks.
General Electric Co. Chief Executive Officer Jeffrey Immelt urges more focus on manufacturing.
“We should set a national goal to create high-value-added jobs and have manufacturing jobs be no less than 20 percent of total employment, about twice what it is today,” Immelt said in a June 26 speech. Fairfield, Connecticut-based GE is the world’s biggest maker of turbines for power plants, jet engines and locomotives.
Zandi and Holtz-Eakin said the U.S. hasn’t thought through how to attack the problem of long-term joblessness.
“We as a nation have not intellectually addressed this,” said Zandi, of Economy.com. “We don’t have a policy answer for it. And I’m pessimistic we’ll get one.”
