Waiting, Wondering, Worrying

What if 10% unemployment is the new normal?

In 2007, Phoenix-based Goodmans Interior Structures, one of the Southwest’s largest office-furniture retailers, booked record sales “well in excess” of $100 million, according to CFO Douglas Klein. Asked about annual revenue for this year, Klein says, “We’ll end up half that size.”

Things are tough all over, of course, but this company’s prospects are especially noteworthy because its sales are so tightly linked to the overall employment picture. “Job growth,” Klein states flatly, “is what drives demand for our products.”

In that case, hold on to your Aeron chair. More than a year after the official end of the Great Recession, unemployment continues to hover near 10%, and Goodmans has had to dip into the all-too-familiar recession playbook. It has deferred certain marketing initiatives, reduced travel, shed warehouse space, and, yes, cut the size of its workforce.

Thousands of companies have done the same, pushing up the unemployment rate to near double digits. The assumption has been that this situation will resolve itself as the business cycle turns. But what if it doesn’t? What happens to an economy driven by consumer spending if 10% unemployment is the new normal?

The idea that the “natural rate” of employment — that is, the rate determined at the micro level by the costs a company must pay and the profit levels it wants to achieve, versus the actual employment rate, which is heavily influenced by the business cycle — has changed is a question businesses must now consider, says Steve Cunningham, director of research and education at the American Institute for Economic Research, a think tank in Great Barrington, Massachusetts. “The costs of doing business, including taxes and regulation, have risen,” Cunningham says, “so a rise in the natural unemployment rate, although hard to measure, is a very real possibility.”

The Congressional Budget Office expects the actual (versus natural) unemployment rate to stay above 8% until 2012 and above 6% until 2014, dropping to 5.1% at the start of 2015, according to September testimony from director Douglas Elmendorf. By comparison, when unemployment reached 10% during the 1981–82 recession, nearly five years passed before it fell below 6%, in September 1987. Looked at that way, then, the current “Great Recession” will play out in much the same way, in terms of unemployment, as what now looks like the run-of-the-mill recession of
1981–82. (Long-term unemployment in 2010 of more than 4%, however, is far above the 1980s peak of 2.6%.)

But what happens to overall employment if the “natural rate” of unemployment has moved well north of 5%? As Cunningham notes, if companies are now paying more on overhead than they have in the past, they will be forced to seek savings elsewhere, and payroll is an obvious target. “It’s a matter of profitability,” he says. “The institutional framework has shifted in such a way that even in an environment with plenty of demand, this [the 9.7% average unemployment rate for the first half of 2010] is the kind of unemployment number that would result.”

U.S. unemployment rate since 1948

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