High jobless rates stymie recovery

The world's richest countries are confronting a harsh reality: There's no quick fix to bring down punishing levels of unemployment.

Economies in the Western world share similarly high jobless rates, but are divided in their approach to economic troubles. While Europe focuses on debt reduction and spending cuts in an austerity drive, the United States is shifting course and is now putting up billions in a desperate bid to revive the lifeless jobs market.

President Barack Obama Thursday unveiled a $447-billion (U.S.) jobs package that includes an extension of payroll tax breaks for workers, money to fix schools, aid for cash-strapped state governments, and road, rail and air infrastructure spending.

It's a big bet to address a massive challenge. Long-term unemployment was almost unheard of in the United States before this recession. Now, more than six million Americans have been out of work for at least six months.

"Long-term unemployment is a new phenomenon in the U.S.," remarked Andrew Sharpe, executive director of the Centre for the Study of Living Standards in Ottawa.

The challenge for Obama, and leaders across much of Europe, is that nearly four years after the world plunged into recession the lost jobs are proving achingly slow to return. Stubbornly high unemployment is the new normal in most wealthy countries, spawning rising social tensions and political turmoil. On Thursday, Greek taxi drivers, hospital doctors and dentists walked off the job to protest the government's austerity plans.

With most governments either unable or unwilling to spend their way out of the mess, there are no quick fixes to what ails the global economy.

Long-term unemployment was virtually unheard of in the U.S. before this recession. Now, more than six million Americans have been out of work for at least six months.

The conventional wisdom was that Americans couldn't afford to stay out of work for long. Stingy UI benefits, no health care and few welfare programs for people without children made life too rough for the unemployed, Mr. Sharpe pointed out. Now it's happening anyway.

The United States has blown such a deep hole in its jobs market that it could take until 2016 or beyond just to get back to where it was when the world tumbled into recession at the end of 2007.

The Washington-based Brookings Institution estimates that the U.S. economy must create 12.4 million new jobs just to get back to break-even.

That's made up of roughly eight million lost jobs and another four million jobs for all the new workers who have come into the labour market since.

This recession has been much tougher on workers than any in recent memory. The jobless rate shot up faster.

More than two years on, most of the lost jobs haven't returned and unemployment remains well above pre-crisis levels in much of the world.

In many Western countries, unemployment is stuck at nearly 10 per cent, and experts warn the rate could stay high for years.

The average rate in Europe was 10 per cent in July, with a clutch of countries much worse off, including Spain (21.2 per cent), Greece (15 per cent) and Ireland (14.5 per cent). The rate in the U.S. is 9.9 per cent.

Canada is a bit of an oasis, with unemployment at 7.2 per cent, well off its recession high of 8.7 per cent in 2009.

But the prospect of any improvement in the near-term is grim with the rest of the world in such a funk, and long-term unemployment has grown sharply.

Tom Porcelli, chief U.S. economist for Royal Bank of Canada, says many of the eight million jobs lost during the Great Recession are likely gone for good and the new normal is likely to limit U.S. consumer spending for years to come.

A huge portion of those job losses were in the decimated housing industry.

And Mr. Porcelli pointed out that with home values still declining in many regions, a lot of those jobs are not coming back.

For years prior to the recession, the natural rate of unemployment was generally considered to be about 5 per cent – meaning the U.S. economy was effectively at full employment at that level. Now, the natural rate of unemployment is closer to 7 or 7.5 per cent, he said.

"What we are saying now is because these people have been unemployed for such a significant amount of time, [their]skills start to diminish. You are not as employable and so, as a consequences, you sit on the sidelines," Mr. Porcelli said during an interview in Toronto.

A higher rate of natural unemployment is likely to persist even after the recovery regains traction.

That's because once companies sense demand is starting to pick up again, they'll still have little incentive to pad their payrolls, he said.

"You are not going to actually add to head count," Mr. Porcelli said.

"You are going to increase hours because you can meet any sort of incremental increase in demand with an incremental increase in hours as opposed to just running out and just hiring someone – which is obviously much more expensive."

There's another more human side to chronic joblessness. The longer people stay unemployed, the tougher it is for them to get hired. Their skills decline, they get discouraged and many simply stop trying. It's a phenomenon economists grimly call "hysteresis."

Meanwhile, younger workers can't get a foot in the door at the start of their careers. And older workers see their retirement security slipping away.

With files from Rita Trichur