Wiped away: The US is fearing another Great Recession

Long-term unemployment helped define the Great Recession. Countless networks, relationships and skills that bound employee to employer were ripped apart in the global financial crisis. It took about eight years for the unemployment rate to recover from that brutal dislocation.

Now economists fear it's happening all over again. The devastating surge in unemployment in March and April was supposed to be temporary, as businesses shuttered to avert the greatest public health crisis in more than a century. Most workers reported they expected to be called back soon.

Jobs are disappearing from the US economy. Credit:AP

But nearly half a year later, many of the jobs that were stuck in purgatory are being lost forever. About 33 per cent of the employees put on furlough in March were laid off for good by July, according to Gusto, a payroll and benefits firm whose clients include small businesses in all 50 states and Washington DC. Only 37 per cent have been called back to their previous employer.

There were 3.7 million US unemployed who had permanently lost their previous job as of July, according to the Department of Labor. That figure doubled from February to June, held steady in July, and is expected to hit between 6.2 million and 8.7 million by late this year, according to a new analysis from economists Gabriel Chodorow-Reich of Harvard University and John Coglianese of the Federal Reserve Board.

The economists' most pessimistic estimate are uncomfortably close to the 8.6 million permanent unemployed seen after the Great Recession. Permanent unemployment and its cousin, long-term unemployment, are tremendous drags on an economic recovery.

"We know that as people spend more time unemployed, their labour market skills atrophy, their connections to the employers weaken and many start getting discouraged and ultimately leave the workforce," said University of Chicago economist Marianne Bertrand, a leading expert on the pandemic's labour market.

The first workers sidelined in the COVID-19 crisis are now closing in on 26 weeks without work, a significant milestone after which the labour Department considers them long-term unemployed. The ranks of the long-term unemployed could swell from 1.5 million now to between 4 million and 5.8 million by early next year, according to Chodorow-Reich and Coglianese.

The gap between the optimistic and pessimistic scenarios is large, and the path we choose ultimately depends on whether the coronavirus can be contained. Over the past several weeks, lawmakers have been debating how much economic support is needed to limit the economic damage until the public health crisis eases. Republicans and Democrats' differing views on how to limit the damage caused by long-term unemployment is undermining their ability to come up with a stimulus deal to replace the Cares Act.

Sheila Frees, 59, thought her unemployment was temporary – soon it will be both permanent and long-term. In March, Frees went on furlough as a part of the first wave of pandemic shutdown causalities. She waited patiently to be recalled to her job at a department store until the end of June, when she was abruptly laid off.

"They drag this on for so long, and you think you're going back, and then you aren't," Frees said. "You weren't going to come back. And they knew it. If you're going to lay people off, do it quickly."

To be sure, the effects of long-term unemployment on the larger economy will be different compared with the last recession. This time, jobless benefits have been higher, at least from April through July, and public-health concerns around the novel coronavirus have effectively barred millions from working.

Economists are fearing a surge in long-term unemployment.Credit:Bloomberg

"What's clear about this particular crisis, compared to the Great Recession, is it's affecting the least advantaged in society – people who don't have access to other safety nets or family resources," Bertrand said. "It's not clear how these people are going to be getting by."

She added that could, paradoxically, also speed the recovery. The less-skilled, less-educated service workers who have been laid off may have an easier time finding an equivalent job in a different industry than the highly specialised workers who spent years after the Great Recession searching fruitlessly for a fit for their skills and education.

The fate of the permanent unemployed is key to understanding the political debate that has prevented Congress and the White House from coming to a deal to extend more stimulus for the unemployed and small businesses.

This is a period of rapid technological change. We are changing the way business is getting done, we're changing the way we're shopping and the way we're eating – we're changing the way we're having meetings.

House Democrats are concerned about the long-term prospects of the unemployed, and they passed a bill in May that would extend the $US600 ($829) in weekly enhanced unemployment benefits through January.

Claudia Sahm, who worked at the Federal Reserve from 2007 through 2019, said the current crisis had gone from "unprecedented" to frighteningly similar to the Great Recession.

"Initially, the layoffs were largely temporary," said Sahm, who is now director of macroeconomic policy at the Washington Centre for Equitable Growth, a progressive think tank. "In recent months, we have seen the rate of permanent layoffs rise. And we should expect more as the relief expires and more small businesses fail and more families can't go out and spend and more communities have to cut essential services."

Yet, Republicans in the Senate, as well as the White House, remain optimistic that most job losses have been and will continue to be temporary. A White House Council of Economic Advisers report out this month estimated 81 per cent of layoffs from February to May were "likely to be temporary rather than permanent," citing labour Department data. That said, the White House report acknowledged the dangers long-term unemployment poses to the economic recovery.

"Before the COVID-19 shutdown, the unemployment rate was below 4 per cent, so we still have a long way to go in recovering lost ground. Therefore, it will be important to ensure that the decline in the unemployment rate continues over the next several months and that these temporary layoffs do not result in large permanent job losses," the report said.



Yet there are increasing signs that unemployment is becoming permanent. With every week that the pandemic rages, distressed businesses are looking at their balance sheets, and either laying off employees or closing entirely.

Americans continue to avoid crowded entertainment, shopping and dining venues, and small-business revenue has slumped. Rent, utility and insurance payments loom, and revenue prospects remain uncertain.

About 4 million US businesses are expected to close this year, according to Oxxford Information Technology, which maintains a database of about 32 million businesses, nonprofits, government entities and farms. During that same period, only 1.3 million new businesses will be formed.

Both figures are worse than the Great Recession, said Raymond Greenhill, Oxxford's president. In just three months from April to June, the country lost 1.85 million businesses, and Greenhill expects the losses to continue well into 2021 as businesses struggle to obtain financing and to cover expenses while operating at reduced capacity. He saw a similar pattern in the Great Recession, when businesses failures kept piling up well after the recovery had officially started.

In late May, a Census Bureau survey showed that only 38 per cent of business owners thought it would take six months or more to recover normal business operations. By mid-August, that number soared to 55 per cent as most business owners lost hope in a speedy recovery.

According to Columbia Business School economist Laura Veldkamp, some of these behavioural changes will become permanent. The pandemic, like the Depression and the World Wars, is fundamentally altering people's tastes. Some businesses will be left behind, as consumers get accustomed to videoconferencing instead of commuting, and buying groceries online instead of braving stores, malls and restaurants.

"This is a period of rapid technological change," Veldkamp said. "We are changing the way business is getting done, we're changing the way we're shopping and the way we're eating – we're changing the way we're having meetings."

As more businesses throw in the towel, more workers lose their connections to the labour market. Those connections – the years of skills, trust and social networks built up at particular employer – are exceedingly expensive and time consuming to rebuild. That's what economists are talking about when they talk about the dangers of "permanent" job loss.

"There's going to be such anxiety and such fear. Their self-esteem is impacted," said Jane Oates, president of nonprofit WorkingNation and former a Obama labour Department official. "Obviously, some of them are going to have to retrain and learn new skills, and many of them are going to have to switch sectors."

Frees, who had worked for five years as an administrative assistant, said she knows she'll survive this recession, but believes workers like her could be adrift for a very, very long time.

"I don't think you can have a pandemic and think everything's going to snap back to normal and we'll be fine," she said. "This will get worse before this gets better."

The Washington Post

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