How unemployment is tearing America apart

With 25 million out of work or underemployed, the U.S. is in the grips of a jobs depression
People wait in line to enter a job fair in New York August 15, 2011. U.S. President Barack Obama began a bus tour of the U.S. Midwest focused on jobs and the economy on Monday, aiming to leave behind doubts about his leadership that could dent his 2012 re-election prospects. REUTERS/Shannon Stapleton (UNITED STATES - Tags: EMPLOYMENT BUSINESS POLITICS)
Tearing apart America
Shannon Stapleton/Reuters

Eight months ago, Deborah Burnley, an administrative assistant in Baltimore, suddenly found herself among America’s growing army of unemployed. Losing her job at a cash-strapped non-profit was a demoralizing and debilitating experience, she says, and to keep her spirits from crashing she’s sought solace in, of all things, the bleak arithmetic of her job hunt: 226 positions applied for, six temp agencies engaged, and countless miles travelled across the region for interviews. “I try to think of it as a numbers game, that each day is basically one more step closer to being employed,” says Burnley, 52. In other words, if she applies for enough positions, and meets enough prospective employers, some day— eventually—she’s bound to find work. But even as she clings to that hope, Burnley acknowledges she and her husband, who also lost his job as a facilities manager six weeks ago, have depleted their savings and almost maxed out their credit cards. “It can be hard to see the light at the end of the tunnel.”

Two-and-a-half years after the Great Recession was deemed officially over, that light has never seemed dimmer for the close to 25 million Americans who are either out of work or underemployed today. Like a gaping wound at the heart of the economy, the U.S. job crisis has cast a vast swath of the population into a state of semi-permanent unemployment. At the same time, America’s housing market is in a shambles and poverty is on the rise. Even if economists weren’t already once again warning of another global recession, a realization is slowly setting in: the United States is suffering from an outright economic depression, and it threatens to leave a deep scar on the American psyche for decades to come. As Robert Reich, a professor of public policy at the University of California at Berkeley and a former secretary of labour, put it recently: “America’s ongoing jobs depression, which is what it deserves to be called, is the worst economic calamity to hit this nation since the Great Depression.”

Exactly where the line between recession and depression lies remains up for debate, but in the eyes of David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto, a depression can be defined as “a prolonged multi-year period of economic malaise.” That succinctly captures the abysmal performance of what was once the world’s greatest wealth creation machine. Many key measures of the economy remain deep in negative territory, and have stayed there despite huge efforts by Washington and the Federal Reserve to spur a rebound.

For one thing, even Americans who have jobs are having to make do with less. During the official recession, incomes in the U.S. fell 3.2 per cent. Yet since the so-called recovery began in July 2009, incomes have kept falling, dropping another 6.7 per cent, according to a recent analysis by Sentier Research. As of June, the median household income in America was $49,909, nearly $5,500 less than it was at the end of 2007. The problem is certain to get worse. Henry Farber, an economist at Princeton, has found that unemployed people who finally land a job are, on average, earning 17.5 per cent less than they did in their old positions.

Home prices also show few signs of hitting bottom. Average prices have already fallen by roughly one-third from their bubbly peak in 2006. If the rout continues, this real estate crash will be worse than what homeowners endured during the Great Depression. The carnage could be even greater now because the rate of home ownership was two-thirds higher in 2006 than it was in 1929. House prices have already fallen back to the level they were at in 2003, erasing trillions of dollars of wealth. With U.S. stock prices roughly where they were in 2002, America was already in the grips of a lost decade similar to what Japan went through in the 1990s, even before the Great Recession began. We just didn’t realize it at the time.

The fact is it has taken until now for the value of America’s economic output, as measured by GDP, just to claw its way back to the level it was at before the recession began. That’s three times longer than the average recovery period for all 10 recessions since the Second World War, according to Bloomberg. That also means any growth in the U.S. economy during the past nearly four years was nothing but a tough slog to make up lost ground. “A depression doesn’t mean the economy is perennially in a contraction phase, just that you have a multi-year period of extremely choppy but anemic growth,” says Rosenberg. “It’s pretty clear America is in a completely different phase than anything we’ve been accustomed to in the post-World War Two period.”

The flood of bad news for workers is unrelenting. In late October, Whirlpool, the appliance maker, said it would axe 5,000 jobs, with one in 10 of them located in the U.S. and Europe. The company will mothball its factory in Fort Smith, Ark., shifting the work to a plant in Mexico instead. At one time Fort Smith was a manufacturing hub, but over the past decade the city has lost 33 per cent of its blue-collar jobs. Workers from all walks of life are suffering. In New York state nearly 7,000 teachers were let go this year. Even the people responsible for processing the mountains of unemployment cheques aren’t safe. In Washington state the Employment Security office was forced to axe 222 jobs because of cuts to government spending.

They will join roughly 14 million people who are already out of work. Another nine million want to find full-time jobs but are stuck in part-time positions. Meanwhile, 2.5 million people would work if they could find someone to hire them, but instead they’ve simply given up. In October the U.S. unemployment rate stood at nine per cent, but the real unemployment rate, which also includes the underemployed, was more than 16 per cent. “For the one-fifth of the American workforce who have been idled, this is a depression,” says Rick Sloan, executive director of the Union of Unemployed, an offshoot of the International Association of Machinists and Aerospace Workers. “Until the jobless find work, we’re going to be mired in a decade or longer morass.”

By far the most corrosive aspect of America’s unemployment crisis is the grinding length of time it’s taking people to find new jobs. Of those who are unemployed, nearly half have been out of work for more than six months, and one-third haven’t held a job in two years. That’s having a devastating effect on people’s mental health, says Arthur Goldsmith, a professor of economics at Washington and Lee University in Lexington, Va., who recently completed a study into the effects of long-term unemployment. Goldsmith found that if a worker is unemployed for 25 weeks or more, he is three times more likely to experience mental health issues for the first time in his life, compared to those with jobs or someone out of work for only a short period of time. Put another way, workers are quite capable of bouncing back from short bouts of unemployment, but once the days and weeks extend into six months or more, serious disorders such as anxiety and depression take hold. “When you get re-employed after a bout of long-term unemployment, your mental health doesn’t go back to the level it was before,” says Goldsmith. “It becomes a permanent scar.”

The crisis has already begun to manifest itself in a breakdown of families. Bradford Wilcox, director of the National Marriage Project at the University of Virginia, has found that marriage rates have dropped 10 per cent since the recession began. At the same time birth rates in the U.S. have dropped sharply, from 69.6 births per thousand women of child-bearing age in 2007 to 64.7 last year. There is also evidence that children raised in families with unemployed parents do less well in school, says Goldsmith, and that men who are unemployed for long periods are more likely to be abusive to their spouses. “Long-term unemployment like we’re seeing now has the capacity to undermine the social fabric,” he says.

One reason there has been a reluctance to acknowledge the current crisis as a depression is because the Great Depression of the 1930s was so traumatic it completely warped our understanding of the term. During the Great Depression the size of the economy shrank by a full 30 per cent, while in the Great Recession of 2008 the economy fell by less than eight per cent. Yet before the Great Depression there were several lesser depressions that nonetheless left the American economy in a deep malaise. In the 19th century the U.S. was rocked by four depressions. In 1893, for example, a bubble in the railroad industry burst and caused the collapse of 153 railroads; more than 500 banks went bankrupt and one in six American men were thrown out of work. Thousands of unemployed men marched on Washington as part of Coxey’s Army, a populist protest movement lead by Ohio businessman and politician Jacob Coxey, which was not all that different from the Occupy Wall Street protest today.

One characteristic that sets this depression apart from a mere recession is the extent to which it has fundamentally altered people’s attitudes, says Rosenberg. Recessions typically lead to short-term corrections in GDP after excesses build up in the system. When a central bank cuts interest rates and the government ramps up spending, the business cycle usually restarts and the recession ends. Depressions are different. For one thing, they invariably follow massive buildups in debt and speculation, in this case around housing. Depressions also change how people live their lives.

Rosenberg sees signs of that in today’s environment. For one thing, home ownership rates are in free fall, suggesting that one of the key pillars of American society—owning a place of your own—has lost its lustre. The propensity of households to live on borrowed money, whether it’s credit card debt or home equity loans, has also hit a wall. American families continue to wind down their debts and save their money, a reversal of three decades of profligacy. Such dramatic changes don’t happen after recessions, and they are why Rosenberg says this crisis is different.

At this point it’s impossible to tell how this modern variety of depression will reshape American society. Rosenberg has some ideas, though. Having such a large army of semi-permanent unemployed workers will leave Americans poorer for years to come. “It not only affects your social fabric and creates social tensions, but it also has a fundamental impact on the long-term potential economic growth of the country,” he says. “What that means over time is a lower standard of living for everybody.”

The downgrade in living standards is already underway in some unlikely places: America’s decaying suburbs. For decades the ’burbs represented the American dream for the middle class—white picket fences, two cars in the garage and a quiet cul-de-sac for the kids to play in. Yet today poverty in the suburbs is growing twice as fast as in cities, according to a recent analysis by the Brookings Institution. In Cleveland, close to 60 per cent of the poor now live in the suburbs, an about-face from a decade ago when poverty was more concentrated in the city itself. Meanwhile, in the suburbs around Chicago the number of people turning to food banks has jumped nearly 170 per cent since 2006. “A lot of the people coming in used to be donors or volunteers who now need help themselves,” says Donna Lake, of the Northern Illinois Food Bank. “They’re very humble about asking for help because they had good paying jobs in six-figure households until a couple of years ago, and never thought they could ever be in this situation.”

In the coming months and years the economic crisis will continue to leave its mark on the United States. Even if unemployment rates begin to drop, the damage for many millions of households will already have been done; their savings have been destroyed, their job prospects obliterated and the value of their homes decimated. This isn’t a repeat of the 1930s, but ask the families who’ve felt the full brunt of the crisis, and they’ll tell you what it is plain and simple. A depression. Their depression.