United-States : Where is the help for the workers?

At the onset of the worst economic crisis in the global economy since the Great Depression, employment losses are starting to mount at a dramatic pace. According to the ILO (International Labour Organization) more than 50 million workers are expected to lose their employment as a result of the crisis. An important share of these employment losses has been concentrated in the USA, locomotive of the global economy and epicenter of the recent financial meltdown.

Since the first moment in which the tremors of the sub-prime collapse were felt in Wall Street, with the collapse of two of the Hedge Funds of Bear Sterns in June of 2007, to this day, unemployment rate of the US went from 4.6% to 9.7%. This is a total increase of 5.1%. In absolute terms, this has represented a total loss of 8 million jobs, or nearly 20% of the projected global losses of employment.

From the perspective of US workers this has represented a catastrophic development. Although in relative terms the current rate of unemployment remains below the historical record of 10.6%, set in 1982 in the middle of the recession caused by the indiscriminate raise of interest rates by the FED, in absolute terms the total number of unemployed in the current crisis has far surpassed anything witnessed before. Whereas at the peak of the early 80’s recession total unemployment affected 12 million workers, the current ongoing recession has nearly 15 million workers looking for a job.

It is important to note that a large share of those unemployed workers is concentrated in the States most affected by the sub-prime collapse, such as California or Florida. Workers in this regions not only are having to deal with the loss of their employment, and therefore of their health care coverage, but also have to face a reduction in public social services, such as education and security, as States have had to slash their spending in order to balance their budgets. This picture is even gloomier in the case of homeowners who, enticed by the false promises of banks, decided to purchase a house in the midst of the sub-prime boom, only to be left dealing with rapidly declining home prices and increasing premiums on their mortgages. Due to this deadly combination of job losses and declining property values, an estimated 25 million homeowners are expected to face a foreclosure process by 2011.

Even more troubling, there are no signs of abatement in the horizon. Although the recession is technically over, according to its statistical definition, employment losses are likely to continue during the following quarters, as it was the case in the jobless recovery of 2001-2003. In that episode, even though economic growth resumed in the first quarter of 2002, unemployment did not peak until the third quarter of 2003 as the sub-prime bubble was well under way. For the current crisis, the official forecast by the CBO (Congressional Budget Office) estimates that the unemployment rate will peak at 10.2% in 2010, and then steadily fall to 9.1% in 2011, and 7.7% in 2012. Independent forecasters, like David Rosenberg, are much more gloomy in their forecast and expect the unemployment rate in 2010 to surpass the record established in 1982, thereby affecting almost 17 million workers.
Nonetheless, even if the US economy recovers following the rosy official scenario there are several elements that allow inferring that this may well be a recovery for the fat paychecks of Wall Street bankers but not for the beleaguered budgets of American workers.

The first element is the increase in the number of workers that are employed part time but would like to be working full time, yet they cannot extend their work hours due to the economic situation. This is the so-called U6 unemployment rate. In historical terms the spread between the benchmark unemployment rate and the U6 unemployment rate has been 4%. As a result of the crisis, this spread, according to the BLS (US Bureau of Labor Statistics), has increased to a record 7 percent point. This means that besides the 15 million workers who are currently unemployed there are another 10 million workers who are unable to get a full time work.

The second element is the reduction of the weekly working hours to a historical record low. From a historic average of 34.2 hours per week it has fell to 33.1h. This reduction came as a result of the fall of private investment and the slashing of inventories by corporations. The significance of these numbers, is that if indeed economic recovery takes place, companies will first increase the work hours of current employees in order to cope with demand, before proceeding to hire new employees.

In this sense, according to John Malaudin, the recovery of work hours toward its historical mean would be the equivalent of creating 3 million full time jobs. Furthermore, the reduction of the aforementioned U6 unemployment rate spread would require the creation of another 4 millions jobs. If we were to spread the creation of those 7 million jobs over a 5-year period, which would barely keep the unemployment rate at its current level, this would require a monthly employment creation of 120,000 jobs. To put this number into perspective its important to remember that, according to the BLS, the two most recent periods of economic growth have translated into an average monthly gain of 150,000 jobs. Thus, even if a recovery of the type that took place in the early 90’s (on the back of the dot com bubble) or at the beginning of this decade (on the back of the sub-prime bubble), manages to materialize it would hardly have any effect on the headline unemployment rate. It seems then than double-digit unemployment rates are likely to become a lasting element of the economic landscape in the US.

Given the lack of social safety nets in the US, an increase in structural unemployment of the kind that is currently taking place can have devastating social effects. According to the BLS, the number of workers currently unemployed who have exhausted their unemployment benefits has increased to an all time high of 52.4%. In absolute terms this implies that nearly 8 million workers have absolutely no other source of income than their previously accumulated wealth. In an environment characterized by the collapse of household wealth due to the collapse of home prices (by far the most important element in the balance sheet of households in the US) and by the stagnation of real wages to the levels present at the early 80’s, this represents a desperate situation that has no “green shots” in sight.

In the meantime, the Obama administration has embarked in a strategy of bailing out bankrupt financial institutions deemed too big too fail, at the expense of the American taxpayer. According to the most recent estimates of the CBO, the US budget deficit is expected to expand by an astounding 9 trillion dollars by the end of the decade, thereby increasing US national public debt to 77% of GDP. As Paul Krugman notes, 30% of that increase comes as a result of the continuation of Bush policies under the Obama administration, such as the controversial tax cuts designed to benefit the wealthiest and the wars in Iraq and Afghanistan.

Thus, as the Obama administration struggles to make a clear stand on the issues of provision of universal health care coverage, climate change and the complete overhaul of the US financial system, it continues to increase the guarantees and protection offered to the same institutions that, through their greedy and reckless behavior, brought the global economy to the point of collapse, in the tune of the trillions of dollars.

This leaves one wondering, where is the help for the workers?