Rise of the Unemployables

Rise of the Unemployables
The engines of job creation fall silent.
by John Hayward 10/13/2011

The U.S. Chamber of Commerce released a grim quarterly report this week that found “the small business outlook on the U.S. economy continues to decline.” The percentage of small businesses planning to add a few employees declined from 18% to 16% in the second quarter, while those with plans to add “many” employees remained stuck at 1%.

This isn’t primarily due to flat sales. That was actually the #3 reason for holding off on making new hires… and it was virtually tied with dread of ObamaCare. The number of businesses citing ObamaCare as their top concern continued to grow.

Eighty percent of small businesses responding to the Chamber of Commerce survey said they would rather have Washington “get out of the way” than “offer a helping hand.” Fat chance, guys. The past failures of the political class are invariably viewed as reasons for more power and control.

Small businesses are the primary engine of job creation, as everyone right up to President Obama agrees. Their reluctance to hire anyone is a troubling sign of the long unemployment wasteland stretching ahead. Making things worse is the growing trend toward long-term unemployment. A rising number of people have become, in a word, unemployable.

The Economist has some terrible statistics:

Over 6 million Americans, more than 40% of all those unemployed, have now been out of work for more than six months. Most of these, 4.5 million, haven’t worked for a year or more. This crisis of long-term joblessness is unprecedented in the post-war period.

Workers are escaping unemployment more slowly than at any time since 1948. The long-term unemployed are struggling most; in the year to June, the newly jobless were three times more likely to find new work in a given month than the long-term unemployed. Many of the latter have given up hope. For the first time in decades, jobless workers are more likely to drop out of the labor force (and cease to be counted as unemployed) than to get a job.

This latter point is important to keep in mind when considering unemployment news, because the widely reported U-3 measurement from the Bureau of Labor Statistics deliberately excludes those who have dropped out of the workforce entirely. For September, the “official” U-3 figure held steady at 9.1%, and made headlines. The real unemployment number, the U-6 measurement that includes discouraged workers, rose from 16.2% to 16.5%.

Peterson Institute visiting fellow Howard Rosen, quoted in a Politico article that notes the percentage of people unemployed for six months or longer hasn’t risen above 26% during the past fifty years, sees the U.S. work force contracting as the population increases:

“We have an immediate problem, which is that people are dropping out of the labor force,” said Howard Rosen, a visiting fellow at the Peterson Institute for International Economics. “It drains the potential of our economy to grow.”

The working-age population increased by 3.8 million over the past two years, but the net size of the labor force has declined by 768,000, he noted.

As you might expect, this is especially tough on young people with low skills entering the workforce as the population increases. In this era of workforce decline, it’s hard to get hired without experience, and it’s hard for a young person to get experience if nobody will hire them. The adjusted unemployment rate for September among those aged 16 to 19 was 24.6%, while it was 14.7% for ages 20 to 24. The situation is even worse for men in both brackets. At age 16 to 19, their unemployment rate is 27.9%, a whopping 6.6% higher than women in the same age group.

President Obama’s defeated “jobs bill” tried to address the rise of the unemployables by offering a $4000 tax credit to businesses that hire them. Besides being grossly unfair to people unemployed less than six months, this kind of monkey-wrench solution misunderstands the causes of long-term unemployment. At the level of hiring where a $4000 tax credit would persuade employers to ignore superior skills and work history, skills and work history don’t matter as much anyway.

The plight of the unemployables isn’t due to a lack of low-wage entry-level positions that don’t pay enough to lure them away from the extremely protracted unemployment benefits they can collect. Those positions also tend to have high turnover. Long-term unemployment relationships are not nourished by tiny one-time incentive payments. The value of discouraged workers is not increased by threatening to punish those who refuse to hire them.

America doesn’t just need more “jobs,” it needs more careers. It needs more new careers.

Obama’s bill included an even stranger provision that would have allowed the long-term unemployed to sue businesses that refuse to hire them, if they could demonstrate the length of their unemployment was a factor in the decision. The resulting flood of frivolous lawsuits would have only made the publication of a want ad even more terrifying for business owners.

What we’ve got is a collapsing workforce, cherry-picked for recently unemployed, highly skilled workers by large corporations. Small businesses that might be willing to take a chance on younger workers, or those with less sterling credentials, are afraid to hire anyone.

Obama’s solutions were foolish attempts to distort the price of labor without altering its value. The value of discouraged workers doesn’t change when little tax-credit carrots are dangled before prospective employers. As the overall demand for employees falls, it’s not surprising to find resumes ever more carefully fished out of corporate in-boxes. A smaller group of people gets hired and re-hired for all the good jobs, while the ranks of the unemployable swell.

The only real answer is to increase the demand for labor, and provide more opportunities for those discouraged workers to re-enter the workforce. The value of their labor only changes when demand increases, to the point where employers who formally considered only the thickest and juiciest resumes are offering on-the-job training to get people in the door. History has shown that sort of improvement comes only with increases in our national gross domestic product: more companies selling more goods and services to a growing base of hungry consumers. Why would anyone expect to find opportunities for marginal workers anywhere except the margins of energetic growth?

Expanding markets, and creating job opportunities, is always a matter of risk taken in the pursuit of reward. What happens when arbitrary government power increases the risks and diminishes the rewards? The answer is written on millions of unemployment checks. The Chamber of Commerce small business survey had it exactly right. The best thing the Obama Administration could do for the unemployables is the one thing it will never do: get out of the way.
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To read another article by John Hayward, click here.