Help wanted

Lyon Roth

The aid being poured into the US economy is not accompanied by a clear job creation strategy.

It's a recession when your neighbor loses his job; it's a depression when you lose your own. ~Harry S. Truman

In December 2007, about 7.5 million people were unemployed in the United States. At first blush, this is a very large number. It is more than the entire population of Israel. However, given the size of the American workforce, that represented an unemployment rate of 4.8%, not an alarming figure by historical standards.

However, since then the rate and the number of people unemployed have more than doubled -- a staggering increase in less than two years. There are now approximately 15 million unemployed, representing 9.8% of the workforce, the highest percentage in 26 years. That number represents a population greater than twice all of Israels inhabitants and presents an absorption challenge that has severely tested, and will continue to test, Americas economy.

Optimists point out that while the numbers are increasing, the rate of increase has slowed down in the last few months. In the first quarter of 2009, the economy shed an average of almost 700,000 jobs per month; in the second quarter, the job-loss rate improved to an average of about 425,000 jobs per month. However, this is hollow comfort for most of the country, and almost all economists believe the rate will reach 10% by year end. This has not happened to the US economy since 1982. Over 25% of those unemployed have been out of work for more than six months, the largest proprtion during a recession since the Labor Department began tracking this statistic in 1948.

By comparison, Israels unemployment rate, at slightly over 8%, is lower that Americas. However, before Israelis feel prematurely proud of the countrys relative success, I suggest we consider the labor force participation rate. In my view, this is a much more important indicator of a countrys work-producing potential. According to the US Bureau of Labor Statistics, the labor force participation rate is defined as the "share of the population 16 years and older working or seeking work divided by the total number of people in that age group." The participation rate is important in determining the number of individuals who are willing to work, are working, or are actively looking for work. Those who have no interest in working are not included in the participation rate. In the United States, that rate remains at around 65%. In Israel, due to the large numbers of Arab and haredi (ultra-orthodox) citizens who are not part of the labor force, its about 50%.

One positive by-product of the increased unemployment in the United States is the increase in Israelis who had been working in America but are now returning home. As Wall Street tumbled and the consulting, legal and accounting professions shed jobs, many well-trained Israelis who were trained at the top firms in these professions are bring those skills back to Israel. So far, it seems many of these have enjoyed a successful re-entry. Their colleagues in America are not as fortunate.

Given the increased population since 2007, the US economy would now have to generate over 9 million new jobs to get back to pre-recession employment rates. That is unlikely to happen anytime soon. Moreover, if you factor in the numbers of people underemployed or discouraged workers who are not seeking employment, the picture gets even worse.

The unemployment rate is generally defined as the number of unemployed persons divided by the labor force, where the labor force is the number of unemployed persons plus the number of employed persons. However, a person who used to work 40 hours a week job, lost that job and now tutors part-time for 4 hours a week is classified as employed, while someone who merely expresses an interest in working is deemed unemployed.

Hence, if we count the underemployed, the numbers are close to 17% of the workforce or about 25 million people. That is an intimidating number, even for an economy as large as the United States. It is also the reason why the government has been printing money so aggressively to fund industry-wide bailouts and stimulus packages. The auto industry employs several hundred thousand workers directly and touches many more industries indirectly. The financial services industry employs millions directly and touches nearly every other industry indirectly. That helps explain why the government, whether run by Republicans or Democrats, was under pressure to spend whatever it takes to save these sectors.

It also explains why few are worried about inflation. With so many people out of work, it will take time to restore consumer confidence. However, I submit that the greater challenge will be to restore the essential dignity that people derive from the ability to work. As the novelist William Barret said Hunger is not the worst feature of unemployment; idleness is.

The current recession is nowhere near the pain suffered during the Great Depression. Over 13 million lost their jobs between 1929 and 1932 as unemployment reached 25%. During those three years, 10,000 banks (about 40% of the total) failed. Industrial stocks lost over 80% of their value. Both GNP and the money supply declined by over 30%. At the beginning of 1933, Franklin Roosevelt entered the White House. He quickly raised taxes, introduced unprecedented regulation and legislation to narrow the gap between the wealthy and the poor, created multiple new federal administrative agencies and, eventually, adopted Keynesian deficit spending policies. By 1934, the recovery started. By the early 1940s, the country was comfortably back on its feet.

All of this should sound very familiar to contemporary observers of American politics. The current administration also inherited most of this mess and was elected on the promise of change. The deficit spending has been accelerated, several czars appointed (in lieu of new administrative agencies) and tax hikes seem inevitable.

To date, there has not yet been a clear job creation strategy. Inevitably, there will be a massive commitment to rebuilding the nations infrastructure and other mega-projects that should generate employment. However, for any strategy to succeed, the change Americans are asked to believe in will have to mean significantly more than what the increasing number of jobless panhandlers will be begging for from passersby.

Lyon (Lenny) Roth is a senior executive at an international wealth management firm and a member of Ben Gurion University's Board of Governors

Published by Globes [online], Israel business news - www.globes-online.com - on November 2, 2009

Copyright of Globes Publisher Itonut (1983) Ltd. 2009

Lyon Roth

 
Lyon Roth
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