10 Percent Unemployment Forever?

Why the good news about the economy doesn't necessarily mean that jobs are coming back anytime soon.

The U.S. economy finally appears to be picking up steam and headed toward recovery: several economic indicators -- including manufacturing and services output, and sales of cars and consumer goods -- have shown noticeable improvement over the last few months. Scan virtually any financial news website, and you'll see it's now a consensus that a sustained economic recovery has not only arrived -- it's picking up speed.

But there's good reason to believe that the labor market won't be keeping pace. Rather than an aberration, high unemployment may be an enduring feature of the United States' economy.

We are, sadly, in a very deep pit when it comes to the labor market. The recent private-sector estimate from ADP Employer Services announced the creation of 297,000 new jobs for December, but this is the first instance of a real dent in the jobless rate since the beginning of the recession. The November report from the U.S. Bureau of Labor Statistics pegged the unemployment rate at 9.8 percent, which translates to over 15.1 million unemployed. Over 40 percent of currently unemployed workers have been out of a job for over six months, the highest percentage of long-term unemployment since World War II. The numbers look even worse if we consider the underemployed, which includes potential workers who have given up looking for a job or the 9 percent of the labor force that is made up of part-time workers who would prefer to be working full-time. At least 2.5 million people gave up looking for work in the last year alone.

Even if the December rate of job creation continues, it will be 2014 before unemployment is down to 5 percent. But last month's good news may not last. At a more conservative estimate of 150,000 jobs added per month, it could be 2024 before employment is back to 2007 levels. Keep in mind that there are 100,000-plus estimated new entrants into the workforce each month. In November, a sum total of 92,000 new jobs were created -- but that didn't lower the unemployment rate.

So what happened? Why have American labor markets ended up in such a dire situation?

The simple Keynesian explanation for the initial unemployment is that aggregate demand -- the country's combined spending and investment -- has been too low. But it's unlikely that spending is the only problem, as unemployment is too high and too persistent relative to similar episodes of disinflation in recent history. If weak demand was the main problem, profits should be collapsing too, but they are not. Investment and corporate profits have been fine for some time now, and they are broadly within the range of pre-recession estimates.

There's a second problem with the Keynesian story, which relies heavily on the notion that real, inflation-adjusted wages are sitting at too high a level. If unemployment causes someone real suffering, why wouldn't he or she be willing to take a lower salary to get a job and ease the pain? But rather than falling, private-industry wages are currently on the rise -- up nearly 60 cents per hour since the end of the recession. There are plenty of good theories why it is hard to cut the wages of employed workers -- long-term contracts pose legal challenges, and fragile worker morale threatens to collapse under the stress of wage cuts. But it's harder to explain why unemployed workers can't find new jobs for less pay, especially if output is recovering, profits are high, and corporations are sitting on a lot of cash.

Many conservatives in the United States have placed the blame for high unemployment on the shoulders of President Barack Obama, arguing that his administration's liberal agenda has complicated the recovery. But the statistics suggest otherwise. Again, corporate profits and consumer spending are fine. Indeed, it's the sector in which the government has most directly intervened -- health care -- that has maintained the most robust job growth over the past two years, adding 20,000 new jobs in November alone. And don't go blaming job losses on illegal immigrants taking jobs from documented workers: Latino immigrants have left the country in large numbers since the start of the financial crisis.

As time passes, it is harder to avoid the notion that a lot of those old jobs simply weren't adding much to the economy. Except for the height of the housing boom -- October 2007 through June 2008 -- real GDP is now higher than it has been in the entirety of U.S. history. The fact that the United States has pre-crisis levels of output with fewer workers raises doubts as to whether those additional workers were producing very much in the first place. If a business owner fires 10 people and a year later output is almost back to normal, it's pretty hard to make the argument that they were doing much in the first place.

The story runs as follows. Before the financial crash, there were lots of not-so-useful workers holding not-so-useful jobs. Employers didn't so much bother to figure out who they were. Demand was high and revenue was booming, so rooting out the less productive workers would have involved a lot of time and trouble -- plus it would have involved some morale costs with the more productive workers, who don't like being measured and spied on. So firms simply let the problem lie.

Then came the 2008 recession, and it was no longer possible to keep so many people on payroll. A lot of businesses were then forced to face the music: Bosses had to make tough calls about who could be let go and who was worth saving. (Note that unemployment is low for workers with a college degree, only 5 percent compared with 16 percent for less educated workers with no high school degree. This is consistent with the reality that less-productive individuals, who tend to have less education, have been laid off.)

In essence, we have seen the rise of a large class of "zero marginal product workers," to coin a term. Their productivity may not be literally zero, but it is lower than the cost of training, employing, and insuring them. That is why labor is hurting but capital is doing fine; dumping these employees is tough for the workers themselves -- and arguably bad for society at large -- but it simply doesn't damage profits much. It's a cold, hard reality, and one that we will have to deal with, one way or another.

So how should we interpret the recent trickle of good news? Well, one positive note is that less-productive, laid-off workers are undertaking the needed adjustments. For instance, according to a survey by the Pew Research Center, nearly 70 percent of unemployed workers have already made dramatic changes in their career or job-field choice, or are considering doing so. There also have been migrations out of expensive urban areas and into smaller and less expensive ones, such as Austin, Salt Lake City, and northern Virginia, with relatively high-performing industries and more fluid labor markets.

In other words, the U.S. economy is going through some major structural shifts. It's not a question of getting back to where we were, but rather that the economy must solve a new problem of re-employing a lot of people who were not, in reality, producing very much in the first place. That's a steeper challenge than we had realized early in the stages of this recession -- and so far policymakers have failed at meeting it.

Analysts still disagree on how rapidly the U.S. economy will recover. But they're missing the point. The era of low unemployment may be in our rearview mirror for a long time to come.

Robyn Beck/AFP


Remembering Samuel Huntington

A man of towering intellect, who never shied away from going for the jugular.

The first time I met Sam Huntington, I was not yet his student; I was an intern for the New Republic. I was still an undergraduate at Yale, and there was a peculiar campaign being waged by a Yale math professor named Serge Lang to deny Sam Huntington a seat in the National Academy of Sciences. I was intrigued by the whole thing, so I went to interview Huntington.

He was more troubled by the campaign than I would have ever imagined. The basic premise was this: Sam was a hawk in general, and during the Vietnam War, he had written a number of pieces, including a long report for the government and a couple of articles in Foreign Affairs, on the matter. Lang believed that this made him effectively a war criminal and argued that Sam should therefore not be part of the National Academy of Sciences. In fact, while he was a hawk on this particular issue, Sam was actually on the dovish side of the debate. He was arguing that the United States needed a much more political, rather than military, strategy in Vietnam. But Lang was fixated on one page of Sam's work.

What I remember most, however, isn't the details of the case, but how transfixed I was just sitting there talking to Huntington, thinking to myself, "this is so fascinating." He was able to take policy debates and frame them in a much broader theoretical context. Sam was able to explain to you what confirms and what falsifies your argument.

A couple of years later, as a Ph.D. student at Harvard, I started working for Sam myself.

Today, in commemoration of Huntington's work at Harvard, I imagine the question for most of you is why you should care about Sam Huntington and why you should read his books. I think more than anything else, Sam Huntington represented the view that social science is about connecting two large variables: the dependent and independent variable. Sam would often say to me, "You have to find a big independent variable and a big dependent variable." In other words, you've got to start with something big to explain. If you're trying to explain something trivial, who cares? Then, if you try to explain the French Revolution, you have to have a powerful reason to explain it. If you have 19 reasons that explain the French Revolution, nobody cares. He once said to me, "If you tell people the world is complicated, you're not doing your job as a social scientist. They already know it's complicated. Your job is to distill it, simplify it, and give them a sense of what is the single, or what are the couple, of powerful causes that explain this powerful phenomenon."

That's always stayed with me as the central insight that Sam Huntington had for his students, particularly at a time, and in an academic profession, in which the instinct was to go for the capillary rather than the jugular. Sam always went for the jugular. If you look at his books, he always asked, what are the biggest things in the world that need to be explained? And what do I think is going on there? He did it with post-colonial development, with American politics when it seemed to be spiraling out of control in the 1970s, with the end of the Cold War, where he saw a resurgence of ethnic and religious identity. Whether you agree or disagree with his conclusions, what is striking is how he never shied away from taking on big questions. Walter Lippmann once said, "Most people mumble because they are afraid of the sound of their own voices." When you put yourself out there, people will disagree with you, and Sam had his fair share of that. People disagreed with him vigorously, but he was trying to shed some very powerful light on what was going on in the world. And he did so in so many different fields.

To me, Sam Huntington's most important book remains Political Order in Changing Societies. That's the book that really changed the way I look at the world. Today, if you are puzzling the question of whether China will get more democratic as it gets richer, this is the book to read. Huntington takes you back in history and makes you understand why the United States has a tough time understanding whether societies become democratic as their economies modernize. I read the book when I was 22 or 23 years old, and I can still remember it vividly. How many books can you say that about when you're 46, in my case?

Sam Huntington was also a man of great character, with a very strong will and very strong beliefs. I remember once reading a furious attack of his work and asking him why he didn't respond. He said, "Well you know, Fareed, my view has always been that you put your best work out, you let people attack you, and then you move on. You can spend your whole life getting caught up in letters to the editor, and 'I didn't say this and I didn't say that,' but it's pointless. The best thing you can do is write the next book which will cause disagreements among people." I thought that was such a fascinating way to look at his role as an intellectual. In many ways, he was thin-skinned like all of us. But he was able to rise above it and act out of this higher mission, this calling.

He was also a man of great principle. It was not always a principle that was popular, a principle that people agreed with. I remember one case when he was chairing an administrative session at the Olin Institute, of which he was the director. The administrative assistant explained that there was a lot of pressure from the university for the institute's brochure to say something like, "We especially welcome and invite blacks and Hispanics to apply to these fellowships." The dean had thought that this would be just a matter of course -- to just throw in the phrase and it would be fine. But Sam said, "You know, I really can't go along with that. I feel very awkward sending special invitations to people based on their descriptive qualities, so you'll have to tell the dean I won't do it." As I say, you may agree or disagree with it, but there's a certain steel to his core that he simply would not compromise, even when it was a trivial matter.

Finally, Sam was a great mentor and believed very much in the human dimension of mentoring. He was a WASP in every sense of the word, and he was emotive very rarely. But there were very few professors who would invite vast numbers of students to their place on Martha's Vineyard and plan a whole day of fun and festivities. He and his wife Nancy used to have us over for these sorts of things. He was representative of some of the best qualities that make Harvard great: great intellectual standards but also a very real emphasis on the human element.

So I think back on Sam Huntington first and foremost as one of the most towering intellects I have ever come across, but also as a great human being and a man of enormous character. As I get older, I feel as though one learns a lot from books, but one also learns a lot from human beings -- and from the character of a man.