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Labor Market Free Fall

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The U.S. labor market is in a free-fall. The economy shed 524,000 jobs in December, the 12th month in a row of job losses. The unemployment rate spiked half a percent to 7.2 percent, and 11.1 million workers are unemployed, well above expectations.

Today’s data underscore the need for quick action on an economic recovery package that focuses on stopping job losses and getting the economy back on track. Any company that has to lay off workers due to the recession drags down economic growth.

employment numbers

The urgency of the problem is clear as the pace of job losses has accelerated rapidly in recent months. Over the past year, the economy has lost 2.6 million jobs—more than in any year since 1945—and the unemployment rate has risen by 2.3 percentage points. The economy has shed nearly 2 million jobs in the past four months alone, indicating that the job losses are cascading rapidly.

The unemployment rate rose by 2.3 percentage points, to 7.2 percent in December 2008 from 4.9 percent a year earlier, when the recession began. The unemployment rate rarely rises by as much as half a percentage point, yet this already had happened once already in this recession (in May 2008). The last time this had occurred previously was in 1980. This is the first time since 1982 that the unemployment rate has risen by 2.3 percentage points over the course of a year.

Most of the unemployed were involuntarily laid off. Nearly six out of ten of the unemployed, or 6.5 million workers (58.4 percent), were out of work because they lost their prior job, up from just five out of ten a year ago. The chances of getting a new job once a worker becomes unemployed are dimming—nearly a quarter (23.2 percent) of the unemployed have been out of a job and searching for work for at least six months, and the typical unemployed worker has been out of a job for 10.6 weeks.

There is little positive data in today’s report, but one oddly bright spot is that due to sharply falling inflation, average hourly wages rose by an annualized rate of 4.0 percent over the past three months, while over the past year, inflation grew by only 0.6 percent so wage growth is far outpacing inflation growth. Real wages often rise during a recession, as retailers lower prices to induce customers to buy. This is likely to reverse course as job losses mount and employers refuse to raise wages in the months to come.

Job losses on this scale put the future of a generation at risk. The share of the U.S. population with a job (61.0 percent) is lower than at any point since 1986. Among teens, the unemployment rate is a shocking 20.8 percent, higher than at any point since 1992.

Job losses were widespread in December. Manufacturing shed 149,000 jobs, for a total of 791,000 jobs lost since the beginning of the recession in December 2007. Employment in motor vehicles and parts has dropped by 17 percent over the past year, shedding 162,000 jobs. Construction continues to hemorrhage jobs: Employment has fallen by nearly 900,000 jobs since its peak in September 2006.

Because job losses have been concentrated in manufacturing, construction, and temporary help, unemployment has risen faster among men than women. Even within industries with high female employment, men have tended to be hard hit. Case in point: the retail industry lost 67,000 jobs last month, but about a third of those jobs were lost by car dealerships, a predominantly male occupation. Overall among adult men over the past year, the unemployment rate rose by 2.8 percentage points, up to 7.2 percent, and the employment rate fell by 2.8 percentage points, down to 69.7 percent—its all-time low. Among adult women, however, the overall unemployment rate has risen by only 1.6 percentage points, to 5.9 percent, and the employment rate has only fallen by 0.6 percentage points, to 57.5 percent.

To get the economy moving, Congress must look to invest government dollars in job-generating policies. So far in this recession, policymakers have focused their energy on addressing the financial meltdown and have pursued expansive monetary policy. The Federal Reserve has aggressively tried to boost the economy, but now there is little room left for maneuver since the Federal Reserve took the federal funds rate down to zero. Even with loose money, credit conditions have improved only marginally (and in some markets, not at all). If anything, today’s data should push policymakers to exercise expansive fiscal policy, since the labor market clearly needs help.

If economic growth does not recover quickly, the prognosis for the labor market is grim. This week, the Congressional Budget Office predicted that economic growth will be negative 2.2 percent in 2009 if there is no economic recovery. Since job losses follow declining economic growth, unemployment will continue to rise if economic growth is indeed negative long into 2009.

The right recovery package, however, could ameliorate job losses in 2009 while creating the potential for long-term economic growth. The plan put forth by President-elect Barack Obama calls for investments in green jobs and infrastructure as well as aid to the states and boosting the unemployment compensation system. While it is likely that unemployment will remain high for quite some time even with a recovery package, targeted investments in our future now will lay the foundation for a strong economy in the years to come.

Heather Boushey is Senior Economist at the Center for American Progress. To read more about the Center’s recommendations to spur economic recovery and growth, please go to the Economy page of our website.

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