Breaking Down Unemployment: Can we turn it around?

FactSet’s Sara Potter, VP, Market Analysis, provides perspective on U.S. and European unemployment rates, at a time when decisive action is called for.

This week, U.S. President Obama unveiled a jobs package designed to help the United States combat the persistently high unemployment rates that have plagued American workers since the recession.  With the economic expansion stagnating, the President’s proposal includes infrastructure spending, tax cuts, and the extension of unemployment benefits in an effort to boost the economy and encourage job growth.  While the success of these measures will take some time to materialize, it is clear that the U.S. labor market has changed significantly with this recession, and now bears a strong resemblance to Europe’s labor market.

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In the U.S., the national unemployment rate has fallen to 9.1%, from a peak of 10.1% in October 2009.  On a state by state basis, the highest unemployment rates are found in the states that suffered the biggest housing market crashes in the downturn and are now facing severe government fiscal crises: Nevada (12.9%) and California (12%).  In contrast, the Great Plains states of Nebraska, North Dakota and South Dakota all boast jobless rates below 5.0%.

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Similarly, in Europe there is a broad range of unemployment rates when comparing individual countries.  The average unemployment rate for the Eurozone is 10% and for the European Union is 9.5%.  Those numbers camouflage the extremely high rates in the countries that have faced major housing market crashes and debt problems: Spain 20.9%, Greece 16.6%, Ireland 14.3%, and Portugal 12.2%.  In comparison, Austria, Luxembourg, and the Netherlands all report rates below 6%.

One of the most striking features of the current U.S. employment market is the increased duration of unemployment.  As we highlighted in the May 2011 Insight article, the number of Americans out of work for more than six months remains at a historically high level; currently this figure represents 43% of total unemployment.  While this is a new phenomenon for the U.S., Europe has been facing this problem for decades.  Higher long-term unemployment has historically been linked to employment safety nets that promote worker retention during recessions. But the safety nets also discourage new job growth during economic recovery, since increased demand can be met with the current work force.  European countries also provide generous unemployment benefits and government support.  The current wave of fiscal tightening in many European countries is likely to jeopardize these social safety nets.

Fiscal problems in the U.S. are also expected to have a continued impact on the labor market and economic growth. Government budget shortfalls at the state and local levels, as well as deficit-reduction measures cutting spending at the federal level, mean more layoffs of government workers and cuts in public programs.  Whether or not President Obama’s plan is accepted, it is clear that an improvement in the employment picture is dependent on a resurgence in economic growth. It remains to be seen whether this program can accomplish both objectives.

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