Monday, May 4, 2009

"Great Recession" Will Redefine Full Employment

Interesting piece out on Bloomberg today on this topic. Basically even after we reach recovery, and have "full employment" again, the landscape will likely be much different. This recession has brought about a paradigm shift in the economy. Sectors like financial services will likely be redefined as new laws and regulations are passed and thus, the financial business model is likely to change. You also have industries like automakers and newspapers facing major changes, those of them that survive, that is.

  • Hundreds of thousands of jobs have vanished forever in industries such as auto manufacturing and financial services. Millions of people who were fired or laid off will find it harder to get hired again and for years may have to accept lower earnings than they enjoyed before the slump.
  • This restructuring -- in what former Federal Reserve Chairman Paul Volcker calls “the Great Recession” -- is causing some economists to reconsider what might be the “natural” rate of unemployment: a level that neither accelerates nor decelerates inflation. This state of equilibrium is often described as “full” employment.
  • Fallout from the recession implies a “markedly higher” natural rate of unemployment, says Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel Prize in economics. “It was 5.5 percent; maybe it will be 6.5 percent, maybe 7 percent.”
  • Laurence Ball, an economics professor at Johns Hopkins University in Baltimore, says unemployment may peak at 10 percent, and “it will be a long time before we see 5 percent” again.
  • The more time workers spend without a job, the less attractive they become to potential employers, Ball says. That in itself helps keep the unemployment rate elevated.
As we witness more power shifting to the federal government, it will be interesting to see their response to this trend. Many believe labor statistics are a little misrepresented anyway, but will this administration redefine what is "full employment"? Its likely.

The economy is always changing too. This isn't necessarily a bad thing. Just because certain business models become obsolete, it doesn't mean that others cannot arise to replace them. This is where the problem of bailouts comes in (I'll save the debate on that for another day). But if you put a band-aid on a business model that is impaired, aren't you just prohibiting what needs to happen (the new sustainable businesses replace the obsolete?)

No comments: