12.07.2009 Policy Points

Right to the Point

An article in the current issue of The Economist offers a to-the-point assessment of the state of the American job market and the policy choices facing federal leaders:

Even though the economy is growing again, this picture is unlikely to change quickly. The hangover from the financial bust means the recovery will be muted. And much as they did after the 1990-91 and 2001 recessions, nervous employers are working remaining staff harder before hiring new ones. Labour productivity has soared, but the result could be a poisonous combination of deep recession followed by jobless recovery. The Federal Reserve’s latest forecasts suggest a jobless rate above 8% in 2011, and half a decade or so until the economy returns to full employment.

The economic scars could be deep. Evidence from Europe suggests that long spells of high joblessness leave a country’s underlying unemployment rate permanently higher, as workers lose skills, becoming detached from the labour force and increasingly hard to re-employ. For America’s young and black workers, especially, that is a big worry.

This grim trajectory suggests an economic, as well as a political, rationale for government action. But what sort? The administration’s original approach was to boost employment by underpinning demand with fiscal stimulus. And for all the criticism of the $787 billion stimulus package, there is little doubt that the jobs picture is less dire than it would have been without it. A report released on November 30th by the Congressional Budget Office suggests it created or saved somewhere between 0.6m and 1.6m jobs. Yet with voters increasingly worried by trillion-dollar budget deficits, that route is harder. The new focus is less on supporting demand than on policies that increase the job-intensity of the recovery.

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