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Permanent vs. Temporary Lay-Offs

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People can become unemployed for a variety of reasons, but generally there are three: they quit, they are temporarily laid off (historically common in manufacturing jobs like Autos) or the job can be permanently eliminated. David Altig, of the Atlanta Federal Reserve's "macroblog" has come up with some evidence as to why the duration of unemployment is so much longer in this recession than in previous ones -- namely because more of the job losses are of the permanent variety, as is shown in the graph below (from http://macroblog.typepad.com/macroblog/).

In good times, a very high proportion of the people who are out of work are so because they have followed the advice of that old song from the 1970’s and told their boss to "take this job an shove it." In the current environment, such people are extremely rare.

In earlier post-war recessions, a far greater percentage of the workforce was in manufacturing. Inventories of things like Autos would build up, and Ford (F - Analyst Report) and General Motors would react by shutting down the plants for a month or two, but those UAW members could be pretty sure that they would get called back as soon as things picked up. Not so this time around. In September, 56% of all job losses were described as permanent. Never before this downturn had that percentage gone above 45%.

As I have pointed out before (see "It's the Lack of Job Creation, Stupid") the core problem facing the job market is the lack of new job creation, not an excessively high number of people being laid off. However, when the layoffs that we do have are of the "forever" type, it makes the situation far worse.

One of the results is that there are a record number of people applying for every job that opens up. This morning’s New York Times has an excellent article that highlights a case where over 500 people applied for a single opening. Was it some super cushy job? Nope -- an administrative assistant post paying $13 per hour, or about $26,000 a year.

While new claims for unemployment insurance have come down off their peak, they remain stubbornly high and suggest the economy is still losing jobs. While recent rates of a quarter million a month are a big improvement over rates earlier in the year of almost three times that amount, we are still talking about job losses, and with a population that is growing. The combination of permanent elimination of positions along with record low rates of new job creation means that unemployment is likely to be a very stubborn problem.

Historically, small businesses have been one of the major sources of job creation, but this time around they are more an engine of job losses, largely because they have been cut off from credit sources. (See "A Rarity: The Small-Business Loan"). It might well be that high unemployment, say over 8%, is the new "normal." That has been the case in Europe for a long time now.

How we deal with that as a society will be a big issue going forward. Do we expand the safety net for these people, and risk having them become long-term dependants of the state, and undermine the incentive for those who still have jobs to stick with them? Or do we take a much harsher position of letting them fend for themselves and end up in a society of even more extreme disparities between the haves and the have-nots -- a land where some live in opulence beyond the wildest dreams of avarice, and vast numbers live on the borders of starvation as is often seen in less developed countries?

Already based on standard measures of income inequality, the U.S, looks much more like Cameroon than Canada -- something that is to some extent masked by the far higher standard of living for both the rich and the poor in the U.S. relative to countries like Cameroon. There is a very real danger that if the level of income inequality were to rise significantly more -- which is what will happen if large segments of the population are permanently unemployed -- that the underlying social stability could be undermined. This is especially true if there is no real safety net like there is in Europe.

Massive multibillion bonus pools at firms like Goldman Sachs (GS - Analyst Report) and Morgan Stanley (MS - Analyst Report), which greatly benefited from taxpayer largess last year, help neither the issue of income inequality, nor, ultimately, social stability.

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