Steinbock: America's Unemployment Cliff

Five Players Who Can Drive Us Over the ‘Fiscal Cliff’
Steve McAlister | Photodisc | Getty Images

In the next few months, America will not only have to cope with a fiscal drag but an unemployment cliff. The recent moderate decline of unemployment masks a long-term trend of structural damage.

During the Obama administration, the Democrats say, almost 4.7 million jobs have been created since early 2010. The Romney campaign believes 7 million new jobs can be generated by cutting taxes.

When the recent jobs report indicated that the U.S. unemployment rate had declined by 0.3% to 7.8% in September, the news caused celebration in the Democratic camp and a wave of skepticism among the Republicans.

Unfortunately, pre-election political partisanship has little to do with long-term unemployment, which is now creating structural damage.

Flawed Forecasts

In the first weeks of the Obama administration in early February 2009, I was in Singapore delivering an address on the prospects of U.S. growth and unemployment prospects. Just a few days before, Christina Romer, then-chair of President's Council of Economic Advisers, had stated that the unemployment rate had risen to 7.6%.

In my address, I argued that the unemployment rate probably already exceeded 8% and that both the Democratic White House and the Republican opposition had gravely under-estimated the severity of the recession.

(Read More: Why Younger Workers Are Being Locked Out of Jobs )

While the new administration did not expect unemployment to exceed 8.5% by the year-end, I expected unemployment rate to soar to 10% or more by the end of the year (it peaked at 10.0% in October 2009).

Also, I did not expect a full return to the pre-crisis level until around 2014-2015, when America would have to cope with a new round of instability, due to the retiring boomer generation, and the ailing health service system which costs far more and delivered much less than its OECD counterparts.

U.S. labor markets are changing – and not for the better.

Structural Damage

During the Obama administration, the private sector has created jobs for 31 months, with payrolls increasing by 4.7 million jobs since February 2010. As the Romney-Ryan campaign likes to point out, the bad news is that there are still 4.5 million fewer jobs on non-farm payrolls than when the recession began in December 2007.

These challenges are felt differently by different Americans. Currently, the unemployment rate is 7.0% for whites, 9.9% for Hispanics, and 13.4% for African-Americans.

U.S. whites live in a world that is typical of today's Germany. There is anxiety, but future looks promising. In turn, Hispanics face a job market that looks more like its counterpart in Italy. Opportunities are insufficient, and youth unemployment is very bad. Finally, African-Americans face a job market that is reminiscent of Bulgaria. Opportunities are shrinking, and youth unemployment is excessively high.

In the past quarter, job growth averaged 146, 000 jobs per month. It is an incremental improvement, but a robust recovery should generate 200, 000-300, 000 jobs a month.

(Read More: Top Destination States for Jobs )

Due to the election year, the public attention is understandably in the rate of unemployment. But the real story is the collapse of labor participation. Since December 2007, the share of U.S. population with a job has plunged from 62.7% to 58.7%. Last time we saw such levels was in the mid-1980s. Similarly, the labor force participation rate is barely 63.6%.

In brief, unemployment rate is declining because more Americans are finding jobs and because many Americans have given up all hope of finding a job.

Expiring Unemployment Benefits

The alternative unemployment rate measure – which includes both unemployed and underemployed (those working part time because they cannot find full-time jobs) – is currently 14.7%. That is significantly below the peak of 17.2% in October 2009, but remains 5.9% higher than at the start of the recession. Some 23 million Americans are unemployed or underemployed.

In his Jackson Hole speech of August 31, Fed chief Ben Bernanke argued that, in the past few years, the Fed's accommodative monetary policies have provided "important support to the economic recovery while helping to maintain price stability."

However, it is a quite different thing to argue, as Bernanke also did, that since the unemployment rate has returned close to its pre-recession level following every previous U.S. recession since World War II, there is "little evidence of substantial structural change in recent years."

In reality, unemployment is increasingly structural. More than 40% of the unemployed are among long-term unemployed. They have been looking for work for 27 weeks or longer. These Americans represent 3.1% of the overall 7.8% unemployment rate.

(Read More: Alarm on Wall Street Grows as 'Fiscal Cliff' Nears .)

Historically, every major recession since 1958 has witnessed the launch of emergency federal unemployment insurance. These programs have not been allowed to expire until the unemployment has fallen at least to 7.2%. But soon this may change.

Today, the fate of the long-term unemployed is intertwined with the so-called fiscal cliff – a cluster of economic challenges, which include not just the Bush-era tax cuts, the automatic spending cuts, and the payroll tax cut, but unemployment benefits and other outlays.

Currently, emergency federal unemployment insurance is scheduled to expire on December 31, 2012. If that happens, millions more Americans will not only be without a job, but at risk of poverty.

Dan Steinbock is research director of International Business at India China and America Institute (USA), visiting fellow at Shanghai Institutes for International Studies (China) and in the EU-Center (Singapore).