A failure to address the jobs crisis now will make any necessary long-term adjustments increasingly difficult in the future – warns think-tank
Two official reports issued earlier this month have dampened the economic outlook on both sides of the Atlantic. First, the United States Department of Labour indicated that the American economy added only 115,000 jobs in April - which represents a slowdown from previous months and is well below what is needed to seriously dent staggeringly high unemployment. An astonishing 12.5 million Americans remain unemployed. The situation is even worse in Europe, where the European Commission's spring economic forecast - released last Friday - anticipated rising unemployment over the near-term. The average unemployment rate increased in 19 out of 27 EU member states in the year ending March 2012.
Take a closer look at the data, and the situation seems even more dire. While the US economy added 201,000 jobs per month on average between January and April – a number on par with the best years of the 2000s – previous job losses have been steep. Add to the official figure the 7.9 million involuntary part-time workers and the 2.4 million who stopped seeking work in the previous four weeks and the picture becomes truly grim. Even more troubling and unusual for the US, 5.1 million Americans are long-term unemployed. This means they have been out of work for more than six months. The average duration of unemployment remains around 40 weeks.
On the other side of the Atlantic, several European countries are struggling with jobless numbers that are extraordinary even for a continent familiar with persistently high unemployment. While the unemployment rate for the 17-country eurozone rose to its highest levels in 15 years in March, the average masks vast disparities. Spain and Greece are both reporting unemployment rates well above 20 per cent and youth unemployment above 50 per cent. Along with Portugal, these countries alone account for 95 per cent of the increase in EU joblessness since late 2010. And there is little reason for optimism in the short-term. With many countries relapsing into recession, the commission forecasts that overall employment will deteriorate even further this year.
It would be dangerous to accept the current situation as the new normal or a necessary by-product of painful economic adjustments. The long-term consequences of unemployment, often referred to as 'scarring effects', are dramatic. The deterioration of skills, loss of work experience, and social stigmatisation lead to decreases in long-term earning potentials, often leaving workers with considerably lower salaries even 15 to 20 years after losing a job. For young people entering the workforce under such circumstances the prospects are especially daunting, as studies show a severely increased risk of recurring unemployment and diminished earnings throughout their careers. Significant and widespread negative effects on health, including on overall life expectancy, and on the families of unemployed persons are also well-documented.
Going beyond the level of personal tragedy, the unemployment trend represents bad news for the long-term economic and geopolitical prospects of the US and Europe. High unemployment signifies a massive waste of economic potential in the near-term, and possibly even in the long-term. National, state, and local budgets are directly impacted both by diminishing tax revenues and increased spending on unemployment benefits; making the challenges of deficit reduction even more daunting. If today's struggling youth, who are part of tomorrow's tax base, suffer from lower potential earnings on a large scale - budgets will be impacted long into the future. Long-term unemployment threatens to turn cyclical problems into structural ones, possibly even raising the natural unemployment rate of countries. For Europe, there may even be severe political consequences; young people confronted with persistently high unemployment rates are unlikely to be strong supporters of the European project.
Even in the middle of austerity measures in Europe and tightening budgets in the US, more needs to be done to prevent the current crisis situation from turning into the new normal. A first step could be to allow for a slower pace of fiscal consolidation in troubled countries such as Spain. As long as these economies are caught in a vicious cycle of deteriorating growth and rising deficits, they will not be able to escape the crisis. In America, this could translate into phasing in necessary budget adjustments over time and only after the economy has recovered further - while immediately increasing public spending in infrastructure and education through aid to states. This would create jobs in the short-term and help to tackle structural challenges in the future. An expansion of hiring credits - subsidies to employers that hire - could also help increase employment. In any case, a failure to address the jobs crisis now will make any necessary long-term adjustments increasingly difficult in the future. Peter Sparding is an economic policy programme officer at the German Marshall Fund of the United States think-tank, which originally published this paper as part of its Transatlantic Take series