Economist: When Jobs Disappear

Welcome to the global Job Crisis. February's unemployment rate was at the highest its been in a quarter of a century. What's even more depressing than the 8% unemployment rate is that 1) it will rise further 2) the chances of these unemployed finding another job soon is worse since records began 50 years ago. Of the 4.4 million jobs lost in America during this recession, 3.3 million have been lost in the past 6 months. No sector is immune to the recession's reaches. The rest of the world faces the same job crises that America currently does. According to the World Bank, another 53 million people will be pushed into extreme poverty in 2009.

The obvious cause of rampant global unemployment is the recession due to the financial crisis of 2008. The credit crunch has led to a fall in demand causing cash-pressed companies to cut costs, including jobs, more quickly. The asset bust and debt involved in this recession means that eventual recovery will be slow and too weak to recover jobs rapidly. Unfortunately, because of the breadth, length, and severity of this current recession, the job crisis it spawned will be perhaps the biggest and longest the world has experienced in decades. What's worse is that the end is not yet in site: "Because changes to unemployment lag behind those in output, jobless rates would rise even further even if economies stopped contracting today." And economies are still contracting.

The remedy for the job crisis is divided into short term and long term solutions. However, if the short term solutions are carried on too long, they could undermine economic growth and recovery in the long run. From a short term perspective, there needs to be policies for the hordes of people who are now finding themselves without a job and without a prospect of a job. America has recently strengthened its social safety net through its stimulus package benefits offering jobless benefits and increasing their duration. Also, states have been given financial incentives to broaden the eligibility for these unemployment benefits. This is all good and well for short term relief, but eventually America will need to get the markets back to a point where they are flexible. This flexibility is a nice way of saying easy job destruction and creation--companies need to be able lay off workers as well as hire new ones with equal ease to keep the job rates at steady levels without sacrificing productivity. After the 1970's oil shock, European countries countered a large loss of jobs by taking measures to keep the job market rigid and encouraging early retirement. This led to decades of high "structural" unemployment in Europe, which eventually led to a decline in growth for a prolonged period of time.

The difficult part for policy makers now will be to determine when the climate is right for what solution. At some point we will have to free up the labor markets again to fully utilize our workforce and increase output.