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42–514 PDF 2008

S. HRG. 110–595

THE EMPLOYMENT SITUATION: FEBRUARY 2008

HEARING

BEFORE THE

JOINT ECONOMIC COMMITTEE

CONGRESS OF THE UNITED STATES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MARCH 7, 2008

Printed for the use of the Joint Economic Committee

(

(II)

JOINT ECONOMIC COMMITTEE

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE

CHARLES E. SCHUMER, New York, Chairman

EDWARD M. KENNEDY, Massachusetts

JEFF BINGAMAN, New Mexico

AMY KLOBUCHAR, Minnesota

ROBERT P. CASEY, JR., Pennsylvania

JIM WEBB, Virginia

SAM BROWNBACK, Kansas

JOHN SUNUNU, New Hampshire

JIM DEMINT, South Carolina

ROBERT F. BENNETT, Utah

HOUSE OF REPRESENTATIVES

CAROLYN B. MALONEY, New York, Vice Chair

MAURICE D. HINCHEY, New York

BARON P. HILL, Indiana

LORETTA SANCHEZ, California

ELIJAH CUMMINGS, Maryland

LLOYD DOGGETT, Texas

JIM SAXTON, New Jersey, Ranking Minority

KEVIN BRADY, Texas

PHIL ENGLISH, Pennsylvania

RON PAUL, Texas

MICHAEL LASKAWY, Executive Director

CHRISTOPHER J. FRENZE, Minority Staff Director

(III)

C O N T E N T S

MEMBERS

Hon Elijah E. Cummings, a U.S. Representative from Maryland ....................... 1

WITNESSES

Statement of Dr. Keith Hall, Commissioner, Bureau of Labor Statistics, U.S.

Department of Labor, Washington, DC .............................................................. 3

Statement of Dr. Rebecca Blank, professor, University of Michigan, Ann

Arbor, Michigan; a Robert V. Kerr visiting fellow at the Brookings Institution, Washington, DC ........................................................................................... 20

Statement of Dr. Christine Owens, executive director, National Employment

Law Project, Washington, DC ............................................................................. 23

Statement of Dr. Lowell E. Gallaway, distinguished professor of economics,

Ohio University, Athens, Ohio ............................................................................ 25

SUBMISSIONS FOR THE RECORD

Prepared statement of Representative Elijah E. Cummings, Chairman (presiding) .................................................................................................................... 35

Prepared statement of Senator Charles E. Schumer, Chairman ......................... 36

Prepared statement of Representative Carolyn B. Maloney, Vice Chair ............ 37

Prepared statement of Dr. Keith Hall, Commissioner, Bureau of Labor Statistics, U.S. Department of Labor, Washington, DC ............................................. 37

Press Release No. 08–0294, ‘‘The Employment Situation: February 2008,’’

Bureau of Labor Statistics, Department of Labor ...................................... 39

Prepared statement of Dr. Rebecca Blank, professor, University of Michigan,

Ann Arbor, Michigan; a Robert V. Kerr visiting fellow at the Brookings

Institution, Washington, DC ............................................................................... 67

Prepared statement of Dr. Christine Owens, executive director, National Employment Law Project, Washington, DC ............................................................ 72

Statement of Dr. Lowell E. Gallaway, distinguished professor of economics,

Ohio University, and Richard K. Vedder, distinguished professor of economics, Ohio University ............................................................................................. 82

Chart entitled, ‘‘Real Weekly Earnings Growth, by Percentile: Fourth quarter

2000 quarter 2000 through fourth quarter 2007’’ ............................................. 91

Chart entitled, ‘‘Monthly Change in Nonfarm Payrolls: Seasonally Adjusted,

January 2005–January 2008’’ ............................................................................. 92

Chart entitled, ‘‘Annual Change in Real Earnings: January 2007–January

2008’’ ..................................................................................................................... 93

Chart entitled, ‘‘Employment in the Construction Sector: Year-on-Year Percent Change in Seasonally Adjusted Payrolls’’ .................................................. 94

Chart entitled, ‘‘Share of the Unemployed Who Have Been Out of Work

for Six Months or More’’ ...................................................................................... 95

A Brief History of Unemployment in Post-World War II America ............... 85

(1)

THE EMPLOYMENT SITUATION: FEBRUARY

2008

FRIDAY, MARCH 7, 2008

CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, DC.

The Committee met at 9:30 a.m. in room SD–628 of the Dirksen

Senate Office Building, the Honorable Elijah E. Cummings, presiding.

Representatives present: Cummings.

Staff present: Christina Baumgardner, Heather Boushey,

Stephanie Dreyer, Chris Frenze, Nan Gibson, Colleen Healy, Tim

Kane, and Jeff Wrase.

OPENING STATEMENT OF HON. ELIJAH E. CUMMINGS, A U.S.

REPRESENTATIVE FROM MARYLAND

Representative Cummings [presiding]. Chairman Schumer

and Vice Chair Maloney were unable to be with us for today’s hearing, and so I thank them for asking me to chair this hearing on

the February Employment Situation.

I want to thank all of our witnesses for testifying here today. I’m

pleased that we have a second panel to examine the outlook for the

labor market and to discuss the plight of the long-term unemployed.

The report we received this morning, is, frankly, shocking. It is

shocking to the conscience, and, I’m sure, very shocking to the people who are suffering in our Nation.

The report shows that our economy lost 63,000 jobs, overall. Let

me repeat that: The report shows that our economy lost 63,000

jobs, overall, in February, but I note that private-sector employment fell by 101,000.

At the same time, the unemployment rate fell by 0.1 percent, to

4.8 percent. This fall in the unemployment rate, which is occurring

at the same time as jobs are being lost, seems to be happening because people believe that there are no job opportunities for them,

and they are simply dropping out of the labor market.

In the last month, Dr. Hall told us that the labor force numbers

almost define the existence of a recession. I am anxiously—anxiously eager to hear what Dr. Hall has to say about our economy,

given the terrible numbers we received this morning.

Frankly, I believe that our economy stands poised on an uncertain cliff, threatening to throw our Nation into a crisis. Sadly, however, many very hardworking Americans across this great Nation,

have already entered their own personal crises.

2

The traditional definition of a recession is two quarters of negative growth. Unfortunately, the difficulty in diagnosing a recession

is that its existence can only be confirmed in hindsight when the

data are seen to show that a slowdown has been definite and prolonged.

As a result, once we know we are in a recession, it’s too late to

prevent one. However, we do not need to recite the litany of familiar data to confirm that our economy is struggling.

One need only look to the millions of families who are struggling

on a day-by-day basis, obviously struggling to find jobs, struggling

to keep their homes, struggling to pay for gas and for home heating

costs, and, yes, struggling to even pay for the food they eat.

Foreclosure filings have increased by 75 percent between 2006

and 2007. According to the Mortgage Bankers Association, a higher

percentage of mortgages are past due or in foreclosure than at any

other time since the Association started tracking such data in 1979.

Many experts fear that the peak in foreclosures has not yet been

reached. At the same time, nearly 8.8 million homeowners now owe

more on their homes than the homes are worth; another 41 million

homes are not facing foreclosure, but are estimated to be likely to

experience declines in value.

Obviously, employment is falling, but for a prolonged period,

wages have failed to keep pace with inflation. Wage growth also

continues to slow, breaking the historic relationship between increased production and real wage growth.

According to a report by the Joint Economic Committee, since

late 2001, productivity has shown an average annual increase of

2.5 percent, but wages have experienced an average annual increase of just 1.2 percent, after inflation. You do the math.

This is particularly disturbing in light of the skyrocketing prices

for everything from food to gasoline and heating oil. In January, we

saw the Consumer Price Index rise by 0.4 percent; oil prices

climbed to nearly $106 per barrel yesterday, and there is talk of

gas prices already reaching $4 a gallon.

I must note that it was a little bit shocking that the other day,

the President of United States was not aware of that.

Families are also facing heating costs of more than $2,000 per

household this winter, over three times the costs in 2001. Unfortunately, while we debate the specific standards of our economy, the

data I just recited, don’t paint the real picture of people whose

dreams, too long deferred, are now in danger of being completely

destroyed.

Every day in my district in Baltimore, only an hour’s drive from

here, I see the desperate look of those who are watching the homes

and the lives in which they invested their money and every ounce

of their energy in danger of slipping from their grasp.

As a matter of fact, today, on the front page of the Baltimore

Sun, there is a very interesting article about the many people in

my district who are struggling to hold onto their homes.

Our Nation needs to do whatever is necessary to create an economy that works for our citizens. Congress recently passed a stimulus package to try help stave off the recession that may be coming

or the one that’s already here.

3

Although the package will offer some relief to millions of hardworking families, the stimulus package was missing critical provisions addressing unemployment benefits and food stamps.

Further, the package included nothing to support expanded investments in our Nation, particularly in areas like infrastructure

development, where investments create roads and public transit

systems, at the same time they create jobs and create a better environment for Americans to travel.

Our Nation’s top priority must be meeting the needs of our citizens and investing in our success. The recent stimulus package,

much like the recent rate cuts by the Fed, is only a temporary

patch.

We cannot continue to keep patching a lagging economy without

also addressing the root causes of our problems, particularly the

mortgage crisis.

The American people deserve better; we can do better, and we

must do better.

[The prepared statement of Representative Cummings appears in

the Submissions for the Record on page 35.]

Representative Cummings. With that, I now will call and introduce Dr. Keith Hall, the Commissioner of the Bureau of Labor

Statistics at the U.S. Department of Labor.

Before coming to the Bureau of Labor Statistics, Commissioner

Hall served as Chief Economist for the White House Council of

Economic Advisors under the current Administration, and prior to

that, he was Chief Economist for the United States Department of

Commerce.

Dr. Hall received his B.A. Degree from the University of Virginia,

and his M.S. and Ph.D. Degrees in economics from Perdue University. Dr. Hall, thank you once again for being with us. You may

proceed.

STATEMENT OF DR. KEITH HALL, COMMISSIONER, BUREAU OF

LABOR STATISTICS, U.S. DEPARTMENT OF LABOR, WASHINGTON, DC

Commissioner Hall. Thank you, Mr. Chairman and Members of

the Committee. I want to thank you for this opportunity to discuss

the February labor market data that we released this morning.

Non-farm payroll employment edged down in February, and the

unemployment rate was essentially unchanged at 4.8 percent. Private-sector employment declined by 101,000 jobs, with losses in

manufacturing, construction, and retail trade.

Employment growth continued in healthcare and food services.

Although housing-related sectors accounted for much of the job decline, job growth appears to have weakened across nearly every industry, with the exception of health care and Government.

Manufacturing employment fell by 52,000 in February, and has

now fallen nearly 300,000 over the past 12 months. Construction

employment fell by 39,000 in February, and has now fallen by

222,000 over the past 12 months.

The February decline in retail employment was 34,000 and included losses in department stores, building materials and garden

supply stores and auto dealers.

4

Average hourly earnings for production and non-supervisory

workers in the private sector rose five cents in February, and have

increased 3.7 percent over the past 12 months.

Over the 12 months ending in January, inflation has outpaced

the growth of average hourly earnings, 4.6 percent, compared to 3.7

percent for wages.

The unemployment rate, at 4.8 percent, was essentially unchanged in February.

The unemployment rate is the same as its average during the

fourth quarter of last year, 4.8 percent, but is above the 4.5 percent

average during the first half of 2007.

Although unchanged in February, the number of unemployed

persons is 544,000 higher than a year ago. This increase has been

concentrated among persons losing jobs with no expectation of

being recalled.

The number of persons unemployed for other reasons, such as

voluntarily leaving a job or newly entering the labor market, has

been little changed over this period.

In terms of duration of unemployment in February, 36 percent

of unemployed have been searching for less than 5 weeks. About

19 percent have been searching for 27 weeks or longer. These proportions are essentially the same as a year earlier.

The labor force participation rate in February declined to 65.9

percent, but has been at or near 66 percent since the second quarter of last year.

Among the employed, the number of persons working part-time,

who would prefer to be working full-time, has been growing. In

February, there were 4.9 million such workers, up about 600,000

from a year ago.

Among those not in the labor force in February, about 1.6 million

were marginally attached to the labor force, up slightly over the

past 12 months, and there were about 400,000 discouraged workers, about the same as a year ago.

So, to summarize, payroll employment edged down in February

by about 63,000, and the unemployment rate was essentially unchanged.

I’d be happy to answer questions.

[The prepared statement of Dr. Keith Hall appears in the Submissions for the Record on page 37.]

Representative Cummings. Thank you very much, Dr. Hall. I

just want to just go through some of the things that you’ve said,

and see if we can’t shine some light on some of this.

I’d like to start by drawing your attention to the chart, which

shows that the pace of payroll job growth has come to a halt in recent months. Does the picture represent the BLS data accurately?

Commissioner Hall. Yes, it appears to.

[The chart referred to, ‘‘Monthly Change in Nonfarm Payrolls,’’

appears in the Submissions for the Record on page 92.]

Representative Cummings. First, what kind—tell me, what

kind of job creation, do we need each month, just to keep pace with

population growth?

Commissioner Hall. Given current population growth, we need

about 150,000 jobs a month.

5

Representative Cummings. Does that number change, Dr.

Hall, when we—at all, when we come to May, when thousands of

young people will be coming out of college, looking for jobs? Does

that figure change?

Commissioner Hall. Yes. This figure is sort of a seasonally adjusted number, so, we take that into account.

Representative Cummings. So this is more of an average; is

that correct?

Commissioner Hall. Yes.

Representative Cummings. And over the past year, we’ve seen

sharp declines in employment in housing-related sectors of the

economy; is that right?

Commissioner Hall. Yes.

Representative Cummings. But now it seems that employment losses and slow payroll job growth are now spread across a

wide array of industries.

Can you tell us where job losses began and what industries are

now seeing employment losses?

Commissioner Hall. In the past 3 months, employment trends

in both retail trade and wholesale trade have shifted from job gains

to job losses.

Construction and manufacturing have been experiencing a sustained period of job decline, and those losses have now deepened

since November.

Professional and technical services and leisure and hospitality

have continued to add jobs over the past 3 months, but at a much

slower pace, and, as I mentioned before, only the Government sector and education and health services have seen sustained job

growth since the beginning of 2006.

Representative Cummings. And so, what does that tell us? I

mean, you look at these figures, and I know—I’m sure you sleep

with them and wake up to them; what does this tell you when you

see this kind of trend?

Commissioner Hall. Sure. We’ve clearly had a broad weakening

in the labor market, and we seem to be at a point where the labor

market job growth is fairly flat right now. We’re at a pause or a

stall, at least, at the moment.

Representative Cummings. You’re saying it’s stalled; is that

what you said?

Commissioner Hall. Yes.

Representative Cummings. And does ‘‘flat’’ and ‘‘stalled’’ mean

the same thing?

Commissioner Hall. Yes.

Representative Cummings. You just used both of them, and I

want to make sure we’re talking about the same thing.

Commissioner Hall. Yes.

Representative Cummings. What would be the next level

down, based upon your vocabulary, from flat and stalled, since they

mean the same thing? What’s the next level down?

Commissioner Hall. Where we start—the next level down, I

suppose, it’s sort of a qualitative thing.

We would start to see sustained job losses broadly through the

economy, and we’ve already seen sustained job losses in manufacturing and construction, so, first of all, not the entire economy is

6

stalled; some parts of the economy are experiencing job losses right

now.

Representative Cummings. But I assumed that when you said

‘‘flat’’ and ‘‘stalled,’’ you were more or less talking about sort of an

average kind of thing.

Commissioner Hall. Yes, that’s right.

Representative Cummings. I just want one word. Just give me

a word, because I want to use that word. What is the word that

you would use if you were going from ‘‘stalled’’ and ‘‘flat,’’ what’s

the next level down in the vocabulary that you would use with your

colleagues here?;

Commissioner Hall. I guess I would go—the next level might

be broadly declining.

Representative Cummings. Broadly declining?

Commissioner Hall. Yes.

Representative Cummings. OK, I’ll write that down. Now,

while up till now, job losses have been concentrated in construction

and manufacturing, this month we see job losses in the private

service-producing industries, which comprise most of the economy;

is that right?

Commissioner Hall. That’s correct.

Representative Cummings. Can you tell us what service industries have seen a slowdown in job creation and how widespread

this trend is?

Commissioner Hall. In services, it’s very widespread; it’s pretty

much all the service sectors, with the exception of education and

health services and Government, have pretty much had a real

slowing in job growth.

Representative Cummings. So, when you have—when we get

to service industries and we see what’s happening there, what you

just described, what does that tell us? Is there any analogy here

to the canary in the cave situation?

Commissioner Hall. Yeah, it’s hard to say that. I think the

labor market, the jobs numbers, are what you might call coincident

indicators; they give you a real good feel about what’s actually

going on right now in the economy.

The basic numbers, I’m not sure how much they tell you about

going forward, whether we know whether this pause will continue

or actually move to a decline, or whether we’ll get a recovery of

some sort.

Representative Cummings. So we don’t know whether we are

broadly declining; is that correct?

Commissioner Hall. That’s correct.

Representative Cummings. And so how long would it take? I

mean, if we had, say, 2 or 3 months of this, do you think you’d be

inching toward the broadly declining statement, or would you still

be with this flat situation that you talked about a moment ago?

Commissioner Hall. Well, certainly in the next month or two,

we’ll be able to tell better, whether this is showing signs of getting

to be a bigger problem with the labor market.

Representative Cummings. Tell me—just give me the significance of service. Is that usually like the last category that you—

I mean, you see things declining in the construction industry, and

7

you named a few others, and when you get to service, is there

something particularly significant about that?

Commissioner Hall. I think it’s fair to——

Representative Cummings. That is, the decline in jobs in that

area?

Commissioner Hall. I think it’s fair to say, services are maybe

a little less volatile than goods, in terms of the employment. Services were certainly quicker to turn around during the last expansion, than, say, manufacturing and construction.

One of the ways I would cut it, perhaps, besides services versus

goods, would be maybe durable versus nondurable goods. One of

the things you certainly see in economic slowdowns, you see durable goods, in particular, take a hit, and durable goods employment,

in particular, takes a hit.

Representative Cummings. In fact, last month, you said, and

I quote you here, you said, quote, ‘‘To some degree, I think recessions are often are almost defined by the labor market.’’

Commissioner Hall. Yes.

Representative Cummings. And I’m continuing the quote, because I want to make sure you said this.

Commissioner Hall. Yes.

Representative Cummings. ‘‘At least in my mind, a recession

is where economic growth slows enough where that it is no longer

creating jobs for a sustained period of time.’’ End of quote.

Do you remember saying that?

Commissioner Hall. I do.

Representative Cummings. You did say that?

Commissioner Hall. I did.

Representative Cummings. Now, given this month’s job losses,

would you say that we’re in a recession or at least very near one?

Commissioner Hall. I don’t want to speculate about where we

go from here.

Representative Cummings. I didn’t ask you to speculate

where we go from here. I asked you whether we’re in a recession.

Commissioner Hall. I don’t want to make that judgment, and

I’ll tell you, in part, because I handle the data, I don’t want to sort

of characterize it more than just sort of what the facts are with the

data.

Representative Cummings. I understand.

Commissioner Hall. It is fair to say that the labor market has

stalled at the moment, and during past economic downturns, there

has been—it’s almost, by definition, a sustained period of where

there are sustained job losses for several months.

Representative Cummings. I understand.

Commissioner Hall. And almost the rule of thumb about two

quarters of decline in GDP, that almost always coincides with several months of real job decline.

Representative Cummings. Now, I’m not trying to get you to

predict anything.

Commissioner Hall. OK.

Representative Cummings. I’m just going to go back to what

you just said. I will ask you then, so, in other words, if we saw this

trend that we see today—and I would ask you—I’m not trying to

get you to predict anything.

8

Commissioner Hall. Right.

Representative Cummings. If we had the same trend that we

have today, 3 months from now, 2 months from now, you would

have to almost conclude, without telling the world, keeping it our

secret, that we’re in a recession. I didn’t say ‘‘predict it,’’ I said, if

it were. I know this is hypothetical.

Commissioner Hall. Right, right. To be honest, I really

wouldn’t want to make that judgment. I can tell you that in past

periods that have been declared a recession, there were broad job

declines across the economy.

At the moment, we don’t have that yet. We have declines in a

couple of sectors, and most of the other sectors have essentially

stalled. But we don’t have large declines in employment across the

economy yet.

Representative Cummings. And you’re taking into consideration, people who have just given up on looking for jobs, too; is that

right?

Commissioner Hall. Yes. And that’s why you need to look at

more than just the job growth; that’s absolutely right. If you look

at the number of discouraged workers and people moving to parttime, you get a more complete picture of the state of the job market.

Representative Cummings. And when you say that, do you

also take into consideration, people who are now—they had to settle for a job that—where they’re earning a lot less money and have

either no benefits or less benefits than they had before, because, in

a sense, they are no longer in that economic situation that they

were before; they don’t have the ability to purchase, and yet still

prices are going up.

I mean, do you take that into consideration, also?

Commissioner Hall. I would. It’s very hard to measure that,

though.

Representative Cummings. Sure.

Commissioner Hall. The sort of thing I think you need to look

at, is things like people who are working part-time for economic

reasons, which, essentially, those are folks who are working parttime, but who would like to be working full-time.

That’s the sort of data that I think of as more directly answering

that question. Actually, it’s hard to tell whether people are in jobs

they don’t like.

Representative Cummings. I understand; I understand. Let’s

discuss the unemployment rate. Some people have said that because unemployment is relatively low, in historical terms, we don’t

yet have an unemployment problem.

However, others point to the employment rate, the share of the

United States population who have jobs, as a better indicator of

how well the labor market is performing.

Now, according to today’s report, the unemployment rate was

statistically unchanged last month, at 4.8 percent, yet the employment rate dropped—the employment rate dropped—to 62.7 percent.

What are the differences between the unemployment and the employment rates, and how have they each fared over the past few

years?

9

Commissioner Hall. The real difference is labor force participation, between those two. If labor force participation is constant,

then those two things are going to tell you the same story, because

one is looking at the unemployed versus the labor force; the other

is looking at the employed versus the population.

So, the difference is labor force participation. If you look at labor

force participation and the unemployment rate, you should get the

same picture as you do with the employment rate.

How they have fared lately, I think the labor force participation

rate hasn’t had any major movement; it’s been hovering around 66

percent, and the unemployment rate has also been hovering around

its current level, at least since the fourth quarter of last year till

now, but it has risen from the first part of 2007.

If nothing else that’s a reminder that this weakening in the labor

market is not a sudden thing; this has been happening now for

over a year, that we’ve had this steady weakening.

Representative Cummings. Is that of concern to you, I mean,

that this has been happening over a year, and it does not seem to

be going in the opposite direction?

Commissioner Hall. Yes.

Representative Cummings. And can you tell us why that concerns you?

Commissioner Hall. Well, obviously, one of the things that’s

important with any of the economic data, is the trend. You know,

if you look at the level of things from month-to-month, things go

up and down, because the measurement is imperfect.

But if you look at the trend, that’s where you get a real picture

of where your labor market is, and obviously, it raises concerns

about where it’s going.

Representative Cummings. So there are a lot of people, apparently, who don’t have jobs.

Commissioner Hall. Yes.

Representative Cummings. And when we look just at the unemployment rate, we don’t necessarily—if we’re just looking at the

unemployment rate, we don’t get a true picture, do we?

Commissioner Hall. No, you don’t; you need to look at other

things besides the unemployment rate; that’s correct.

Representative Cummings. And that’s because so many people

have probably given up?

Commissioner Hall. That happens, yes.

Representative Cummings. And perhaps the jobs are not

there?

Commissioner Hall. Yes.

Representative Cummings. Are there any other reasons?

Commissioner Hall. Oh, no, that’s a good reason why you need

to look beyond the unemployment rate, absolutely.

Representative Cummings. OK. Typically, African Americans

see an unemployment rate that is twice the level of whites. Is this

the case this month?

Commissioner Hall. Yes, it is. I think the unemployment rate

this month, fell to about 8.3 percent, and that’s about in line with

the way it’s been for all of 2007, and that is, obviously, quite a bit

higher than the overall average.

10

Representative Cummings. Is it also true that African Americans also have a lower employment rate, and if so, how much

lower?

Commissioner Hall. They do have a lower employment rate,

and I want to dig the number up here for you.

Representative Cummings. Mr. Rones, how are you doing?

Mr. Rones. I’m good. How are you?

Representative Cummings. Good seeing you again. I forgot

about you all. Mr. Horrigan, good seeing you also.

[Pause.]

Mr. Rones. So, the employment/population ratio for whites was

63.3 percent in February; for blacks or African Americans, it was

58.4 percent.

Representative Cummings. What’s that, about 5——

Mr. Rones. Five points lower.

Representative Cummings. Five points lower. Is the discrepancy between the unemployment and the employment rates, because people are leaving the labor force, do you think, overall?

I’ve moved now from the African American situation.

Commissioner Hall. The actual number of unemployed hasn’t

changed that much over the past 12 months. The number of unemployed is still about 7.4 million.

[Labor Department witnesses confer.]

Commissioner Hall. I’m sorry.

Representative Cummings. That’s OK.

Commissioner Hall. Yes, actually, it’s up. The number of unemployed has grown from about 6.8 million to 7.4 million.

Representative Cummings. Of unemployed?

Commissioner Hall. Of unemployed, that’s correct. And for

those not in the labor force, I think I had this in my earlier statement, the level that are marginally attached to the labor force,

that’s up slightly over the past 12 months, but it’s about 1.6 million.

Representative Cummings. And when you say ‘‘marginally attached,’’ what does that mean?

Commissioner Hall. That means that people who want to work

and are available to work, but they’re not currently looking for

work. So they are people who have looked for work in the past 12

months, they’re not looking right now, but they want to work and

they are available for work.

Representative Cummings. But there is one factor that you

left out. Are there jobs for them?

Commissioner Hall. Well, yeah, obviously, that can be a reason

for why this number changes over time.

Representative Cummings. All right, I just wanted to make

sure we had the whole picture there.

Commissioner Hall. Absolutely.

Representative Cummings. How high would the unemployment rate be, if it included those who worked part-time for economic reasons, as well as those who were marginally attached to

the labor force, and has this been changing over the past year?

Commissioner Hall. That number is actually our broadest

measure of unemployment. We have some alternate measures,

rather than just the unemployment rate.

11

* BLS notes: Long-term jobless rates for all regions were little changed from 2006.

That’s at about 8.9 percent, and that’s up from about 8.1 percent

a year earlier.

Representative Cummings. The key theme of today’s hearing,

as shown in the chart, is that the share of the unemployed who

have been out of work for at least 6 months is relatively high. We

have a chart here that shows the trends.

[The chart referred to, ‘‘Share of the Unemployed Who Have

Been Out of Work for Six Months or More,’’ appears in the Submissions for the Record on page 95.]

Can you tell us about these trends in the long-term unemployed?

Did this indicator ever recover from the 2001 recession, and how

does it look in historical terms?

Commissioner Hall. Well, this indicates that the number of

long-term unemployed, as you might expect, typically peaks somewhat after a recession, after an economic downturn, because people

have to be unemployed for 6 months.

And the typical pattern has been that this number has gotten as

high as 2.5 percent of the labor force. This past recession, it got to

be almost 1.5 percent of the labor force, and it’s been in steady decline down to about 0.75 percent of the labor force.

In past business cycles, this decline has continued on down to

less than half a percent, so I guess to summarize, the trend in

long-term unemployed, typically goes all the way down to about

half a percent of the labor force, and we haven’t gotten there yet.

Over the past year or so, this decline has stalled.

Representative Cummings. And you have clear data on that;

is that right?

Commissioner Hall. Yes, we do.

Representative Cummings. And I guess that’s easy to track,

because you look at who the unemployed were, and you then see

that they’ve run out of benefits; is that how you do it?

Commissioner Hall. No. We do it as part of our survey.

Representative Cummings. I got you, OK. Have high levels of

long-term unemployment been concentrated in particular regions of

the country, or, in particular, demographic groups defined by education, race, or gender?

Commissioner Hall. Yes. In 2007, about 20 percent of the jobless were in the Midwest and Northwest regions. I’m sorry, about

20 percent of the jobless in the Midwest and Northeast regions,

were long-term unemployed.

That’s compared to about 17.6 percent for the country, as a

whole.

The South and Western regions had long-term jobless rates of

about 16.6 percent and 15 percent, respectively, and that’s below

the average.

Representative Cummings. And where was that?

Commissioner Hall. South and Western regions, where about

15 to 16.6 percent of the unemployed were long-term unemployed.

Representative Cummings. And has this changed over the

past year?

Commissioner Hall. Yes, I’d say the Midwest and Northeast regions have had more than their share of long-term unemployed.*

12

Representative Cummings. And why is that; do you know?

Commissioner Hall. That, I don’t know. I haven’t looked at it

carefully. The most obvious thing has been that job growth simply

hasn’t been as strong during this economic expansion in those regions.

I haven’t looked at that, but that would be my anticipation, but

I don’t know.

Representative Cummings. I mean, do you normally look at

things like that? In other words, if you see that people seem to be

employed in one area and not employed in another, and it’s a relatively significant difference, is that something that would concern

your organization?

Commissioner Hall. Yes, absolutely. We do collect data on

States and regions, and if you look sometimes at regions and

States, you can see a rather different economic situation.

You can literally have States that are in an economic downturn,

while the rest of the economy is in an expansion.

Representative Cummings. And are the long-term unemployed

concentrated among older manufacturing workers who may have

been displaced due to plant closures in places like upstate New

York, Ohio, Michigan?

Commissioner Hall. For the Nation as a whole, the long-term

unemployed, that’s about 17.6 percent. That’s the average.

In Michigan, it’s 24 percent; in New York, it’s 22 percent; and in

Ohio, it’s about 18 percent; so those are three examples that are

above average.

Representative Cummings. And some industries, especially in

manufacturing, had a tradition of temporary layoffs followed by recall, as the economy improved.

To what degree is the relative growth in long-term unemployment, due to changes in the industrial structure of the economy?

Commissioner Hall. That, to me, is unclear. I haven’t done a

detailed study of that. Certainly, one obvious reason for this, the

recent rise in long-term unemployment, is the relatively slow

growth of job growth, broadly, in the economy.

That’s clearly a contributing factor. I don’t know how much it’s

been from changing industrial structure.

Representative Cummings. Now, it’s common to see high levels of long-term unemployment at the end of a recession. Is there

a recent precedent for a situation like we are seeing today, where

we’re seeing such high levels at the start of an economic slowdown?

Commissioner Hall. That’s a good question. I think—I’m sort

of looking at some of the data right now.

[Pause.]

The most notable thing is, in fact, that we are starting from a

fairly high level, and we’re starting to see the a long-term unemployed rise.

Representative Cummings. That’s a major problem, isn’t it?

Commissioner Hall. Yes.

Representative Cummings. So, do you have anything good to

say——

[Laughter.]

13

Representative Cummings [continuing]. To the people that

might be watching this on CSPAN? It’s getting a little depressing

up here.

I’m not trying to be funny. I’m just—I guess I’m looking for something to—I mean, is there something good? I don’t want you to go

back to your neighborhood and everybody say, ‘‘We saw you on

CSPAN, but you didn’t have anything good to say.’’

Commissioner Hall. Well, I don’t want to appear to be trying

too hard here, but I——

Representative Cummings. Very seriously, I mean, I’m just

trying to get to—we seem like we’re marching down a road, Commissioner, where it’s just dark.

And it seems like almost every answer I get—and you’re doing

a great job answering my questions—but I guess I’m trying to

paint this picture of, is there—I’m looking for this light down the

end of this tunnel, and I don’t see it.

And I don’t even see a match being struck at the end of the tunnel, let alone a light. So I’m trying to figure out, you know, what

you see.

And I understand you don’t want to predict. I’m just trying to figure out what you see.

Commissioner Hall. I’d say that the good news in here, I suppose, is not what I see, but what I don’t see.

Representative Cummings. OK.

Commissioner Hall. We don’t have broad losses in jobs. We

don’t have job loss, broadly. Right now, obviously, it’s in manufacturing and construction, but most of the rest of the sectors are, at

the moment, stalled.

Representative Cummings. And we’re stalling in service?

Commissioner Hall. Yes.

Representative Cummings. And that concerns you?

Commissioner Hall. Yes, absolutely. But, as I say, the encouraging part is what we don’t see at this point. We don’t see large

job losses, broadly, in the economy.

In past economic downturns, we’ve seen rather large increases in

job loss, people who had jobs and lose jobs. We haven’t seen that

yet.

And again, we also haven’t seen a large increase in the unemployment rate. But of course, if we don’t get stronger job growth,

we might then see a larger increase in the unemployment rate

going forward.

Representative Cummings. Let me make sure I understand

what you just said. Are you telling me that the people who—the

vast majority, I guess—and again, correct me, I’m not trying to put

words in your mouth.

Commissioner Hall. Right.

Representative Cummings. The vast majority of people who

don’t have jobs right now, are people that did not lose their jobs,

but they’re more or less people who, for whatever reason, came out

of the job market and can’t get back in. Is that what you’re saying?

And I’d really like to know what you base that on, and I’d also

like to know what percentages you’re talking about. I spent the

weekend up in Ohio, last weekend, talking to a lot of people, and

a lot of the people that I talked to have lost jobs.

14

Commissioner Hall. Let me clarify a little bit. The people who

lost jobs, they’re still the majority of the unemployed; they’ve lost

their jobs.

Representative Cummings. OK.

Commissioner Hall. But what we’re not seeing—and, again, I

say that the good news is what we’re not seeing.

In the past downturns, this number has increased dramatically.

Representative Cummings. Let me just stop you right there,

because I want to make sure. We have a group of people over here

who actually did lose their jobs.

Commissioner Hall. Yes.

Representative Cummings. And so they’re out there with no

work.

Commissioner Hall. Yes.

Representative Cummings. OK. Then there is another group

of people who are no longer—who, for whatever reasons, came out

of the job market, but can’t get back in. Maybe somebody left to

perhaps have a baby, or, you tell me.

I mean, the kinds of things. Maybe they just decided to take a

break; is that OK?

Commissioner Hall. Yes.

Representative Cummings. Now, is there another group that

would have no job? I guess there’s the other group that perhaps is

coming out of school, new to the employment picture, that don’t

have a job, right?

Commissioner Hall. Correct.

Representative Cummings. Is there another broad group that

you can think of?

Commissioner Hall. No, I think that’s basically it.

Representative Cummings. Can you break those down into

percentages, just off the—I mean, just generally. I’m not trying to

hold you to that. Just give me an idea, so that we’ll have a clear

picture.

Commissioner Hall. I do think I have got that somewhere. Let

me take a quick look here.

Representative Cummings. So those are the kind of stats you

also keep?

Commissioner Hall. Yes.

Representative Cummings. Oh, wonderful.

[Pause.]

Mr. Rones. Mr. Chairman, you have maybe 7 million unemployed people. So that is one group of people who do not have jobs.

There are toward 70 million adults who are out of the labor force

for a whole range of reasons, many of those—the vast majority

have no interest in work at this particular time. But they are——

Representative Cummings. Seventy million?

Mr. Rones. Roughly speaking.

Representative Cummings. Seventy million Americans have

no interest in working? Is that what you just said?

Mr. Rones. Sure. And a lot of those are people who are students,

full-time students, retirees, homemakers who choose to do that. So

it is very large group. Actually I see it is up toward 80 million. But

within that group are a lot of people who you have alluded to: Students who will graduate at the end of the semester in May or June

15

who will be coming into the labor force; people whose personal situation changes. For instance, they had had family responsibilities

but they do not have them anymore. Or their kids are 6 now instead of 5 and they are in school and they can work.

And so you actually get in any month and in any year a lot of

people coming into the labor force who perhaps the last year had

been out of the labor force. And those are people who are looking

for work.

The main thing that we are seeing now, as the Commissioner referred to, is not that you have a lot more people losing jobs—in

fact, we really do not have more people going from employed to unemployed—it is that once they are unemployed, they are having a

harder time finding new jobs.

And that is what typically happens when the job market slows

down. It is not that there are mass layoffs; it is that when you are

unemployed, all of a sudden people are not hiring as much as they

were hiring before. And that is what we are starting to see now.

Representative Cummings. And one reason for that, I guess,

would be attrition. In other words, people see that they can do

without, or because the economy does not allow them to hire more

people—I mean, this is just a guess—and so the employer says: I

am not going to replace folks in those positions.

Is that one of the reasons, do you think?

Commissioner Hall. Yes.

Representative Cummings. And let me tell you where I am

going with this, because I am almost finished. I guess when I listen

to all of this, it seems like we seem to be extending some unemployment benefits, wouldn’t you say, Mr. Hall—Commissioner Hall?

Commissioner Hall. I don’t know that much about the unemployment benefits.

Representative Cummings. You know that there are people

who do not have—they have run out of benefits, and they—I am

just going to give you a little lesson here—and then they do not

have money to do the things that they need to do, like buy groceries and take care of their kids, and buy clothing, and buy gas,

and they run out.

And you have the figures of the people who have run out, and

you have the figures of the people who cannot find jobs. I mean,

at some point it seems like somebody has to say: You know what,

we have got a lot of people who are in trouble and we need to do

something to help them.

And I know, I know, I know, that is out of your—you know, you

do not like to give opinions, but you keep these stats, and this is

what you do. And I am just kind of figuring out, you must think

about this, don’t you?

Commissioner Hall. Sure. Sure.

Representative Cummings. And what do you think?

Commissioner Hall. Well I certainly think the unemployment

insurance programs are important.

Representative Cummings. And do they need to be extended?

Commissioner Hall. I do not want to offer a judgment on that.

Representative Cummings. I understand. OK, let me just ask

you something else. In the recessions of the early 1900s and the

early 2000s, the unemployment rate was at 5.7 and 7 percent reVerDate 11-MAY-2000 09:23 Nov 21, 2008 Jkt 042514 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 C:\DOCS\42514.TXT DianeA PsN: DianeA
16

spectively when Congress extended the unemployment insurance

benefits. While that is higher than what we see today, is it not also

the case that the share of the unemployed who are long-term unemployed is higher today than it was in the early 1900s and the

early 2000s when Congress extended Unemployment Insurance

benefits?

Commissioner Hall. I am not sure when the unemployment

benefits were extended, but the percent of the labor force that is

long-term unemployed is about the same as it was in roughly

1996–1997; so 1996, to say 2001, the share of the labor force that

was long-term unemployed was lower than it is now.

Representative Cummings. OK. Let’s talk about wage growth

for just a moment. How well the labor market is performing is not

just about employment, but also about wages. Is that right?

Commissioner Hall. Yes.

Representative Cummings. These trends also look very disappointing. Would you agree?

Commissioner Hall. In terms of real wage growth, yes.

Representative Cummings. Yes. This chart here shows that

inflation adjusted wage growth has turned negative in recent

months. Did wages fall again compared to inflation in February?

[The chart referred to, ‘‘Annual Change in Real Earnings,’’ appears in the Submissions for the Record on page 93.]

Commissioner Hall. We do not have inflation data for February, so I do not know.

Representative Cummings. My understanding is that wage

growth should be tied to the productivity of workers. That is, how

much stuff workers produce per hour. But has that been the case,

or has it been that productivity growth has far outpaced wage

gains over this entire business cycle?

Commissioner Hall. Productivity has outgrown real wage

growth. From 2000 to 2007, productivity grew about 2.5 percent a

year, and real hourly compensation—which has been deflated with

consumer prices—has grown about 1.3 percent a year.

Representative Cummings. So in other words we have been

producing more and making less? Is that right? Is that what you

are saying?

Commissioner Hall. Well, not——

Representative Cummings. I just want you to tell me, interpret what you just said.

Commissioner Hall. OK. Not making less, but so far in this

decade the growth of compensation has not matched the growth in

productivity.

Representative Cummings. That is what I said. Maybe we are

just saying it a different way.

Commissioner Hall. Yes.

Representative Cummings. In other words, Americans are

working hard, and their efforts are producing things, but while

they are producing all this and working hard their wages are not

staying level with that level of production? Is that right? Is that

a fair statement?

Commissioner Hall. Yes. Over this time period, yes.

Representative Cummings. Is that unusual?

17

Commissioner Hall. It is not unusual for compensation to lag

productivity in the early parts of an expansion, but if we deflate

hourly compensation with the implicit price deflator for the goods

and services that workers and producing, it typically catches up by

now.

Representative Cummings. And should it have caught up by

now?

Commissioner Hall. In the past it has. So typically it has, but

it has not yet in this expansion.

Representative Cummings. OK, let’s zero in on right where

you are. So in the past, by now it would have caught up?

Commissioner Hall. I think that is a fair statement, yes.

Representative Cummings. And so it is not happening the

way it has happened in the past. And what does that say? What

does that tell you?

Commissioner Hall. Um——

Representative Cummings. And a little earlier you talked

about trends. You said trends are very significant because they

show you where we are going. And although you do not do any predicting—I understand that—but what does that say?

Commissioner Hall. I think this is consistent with the generally weaker job growth that we have had during this expansion.

It is part of the overall picture that the labor market hasn’t been

as strong during this expansion so far.

Representative Cummings. And I guess when you throw into

the formula the fact that health care is going up, and people do not

have in many instances the benefits that they once had, that just—

I guess that is not part of your measuring there, is it? Or is it?

Commissioner Hall. Well the compensation includes employerprovided health care, but it does not measure privately paid health

care.

Representative Cummings. I see. So a person, even if they got

a job and if they were making more money, were making a decent

wage, now if they had benefits now—they do not have benefits—

and they have that one incident that happens where they go and

are treated for a day or two in a hospital and come out with a

$15,000 to $20,000 bill, they have got problems?

Commissioner Hall. Certainly.

Representative Cummings. Over the past year, have changes

in wages been the same across the wage distribution, or have they

been concentrated among higher or lower paid workers?

Commissioner Hall. It seems to be actually fairly even if you

look at broadly—I am going to switch to median usual weekly earnings because we have that broken down by deciles—from the fourth

quarter of 2006 to the fourth quarter of 2007, real median weekly

earnings have been little changed for the overall, the median.

That is also true of the 9th decile, which is the fairly high paid

folks, and it is also true of the 1st decile, the low-income folks. So

it actually has been fairly consistently—we have seen very little

real wage growth for either of the groups.

Representative Cummings. So we have got a lot of people who

are unemployed. We have got a lot of people who cannot—we have

got a lot of people who have lost jobs. We have got a lot of people

who went out of the job market and cannot get back in. And then

18

we have got all these students who are going to be graduates in

May who are probably not going to be able to find jobs.

But I want to concentrate on them for just a moment. What do

you see for them? You know, we have all these parents who have

paid all this tuition, and young people who have worked hard, done

everything they know how to get the good grades, and now they are

about to enter this job market. When we compare the market that

they would have entered, say last year to this year, is it about the

same?

Commissioner Hall. Certainly economic growth is not as strong

now as it was a year ago.

Representative Cummings. So they are going to have a tougher time getting a job?

Commissioner Hall. I do not know about going forward. It

would be nice if economic growth would pick up, but if things stay

like they are now they would have a tougher job.

Representative Cummings. I am talking about 2 months from

now. Maybe 3 months. And people are beginning to hire now.

Young people are actually getting commitments now for jobs. So we

have got young people—so that is going to add. If things continue

to go at the rate they are going, we are going to have a group of

young people who I guess are going to either—I guess they are

going to have to go back to mom and dad.

Commissioner Hall. Yes, that is certainly—when you have a

slow or stalled job market, that is certainly—you have people who

go back to school, stay a little longer at school, and people do have

trouble entering the job market.

Representative Cummings. Let me ask you this: I said in my

opening statement—and I am finished now—I said that we can do

better as a Nation, and I truly believe that. I believe we can do better.

I am just wondering. I mean, I am always reluctant to ask you

questions, Commissioner, because I know you have this little box

you operate in, and I want to try to take you out of it just a little

bit, but what do you say to the powers that be when they say: Well,

what can we do? You have got the information. What is it that we

need to do to try to straighten some of this out to try to do better?

Commissioner Hall. Well, without getting into policy issues——

Representative Cummings. Without getting into policy.

Commissioner Hall. Without getting into policy issues, strong

economic growth is just extremely important. When you have

enough growth, it supports job growth. It makes a huge difference.

This is one of the reasons why it is very important to avoid business downturns, the business cycle, because it is very costly. People

lose jobs. Unemployment goes up. And it picks on certain groups:

the people who are less educated, less trained; it picks on some minorities; those unemployment rates go up quite a lot during economic downturns.

It is important, extremely important, to do what you can to avoid

these.

Representative Cummings. And now for ‘‘the’’ question. How

do you do what you just said?

You said it is important that you avoid it. How do you do that?

I mean, because there are a lot of people who are looking at you

19

right now saying: What do we have to do? Certainly this Congress,

we are trying to help our constituents, and we are trying to figure

out what we can do to avoid—I mean, I am just keeping you in

your own little, your box there.

Commissioner Hall. Well staying in my box——

Representative Cummings. OK, it’s a big box, OK, a big box.

[Laughter.]

Commissioner Hall.—I would have to say that is one of the reasons why we take a lot of time to collect economic data. That is

why we spend a fair amount of money collecting data and providing

it, so people can make decisions.

Economic downturns happen I think in large part when people

have uncertainty. They do not know what is going on. And it is extremely important that people understand the economy. They have

knowledge about the economy. They make informed decisions about

the economy. I think that is extremely important. Not only do I

mean individuals, I mean firms, and I mean policymakers as well.

Representative Cummings. So Commissioner, you just said

the magic words. I think what you are saying is that your job is

to provide the data, and that data shows us where we are going.

It shows us whether we are going down the cave where we cannot

see even the slightest match being lit. Definitely no light.

Or it may show us a new day, and sunshine. And we need to act

on those things before—but I guess we needed to act before we just

saw darkness. Is that a fair statement?

Commissioner Hall. Yes. Obviously the quicker you respond,

the better the policy.

Representative Cummings. Is it too late?

Commissioner Hall. I do not know. I do not know. I will step

a little out of my box. I think we have already been very aggressive

in terms of our economic policy. The question will become: Were we

aggressive enough, and were we early enough?

Representative Cummings. And when you say we have been

already aggressive, I just want to know—I just want to understand

when you said we were aggressive, what did we do?

Commissioner Hall. I think both with the Fed and the stimulus package. Those were not trivial things.

Representative Cummings. Yes. I understand. The Fed, I

think we are beginning to see a little bit, maybe, but the stimulus

package is still—you know, I was listening to Ms. Orman, I think

that is her name—the other day, and she was saying to the people,

when they get their money back from the stimulus package, not to

spend it. She said, hold onto it because you are going to need it

for gas. And, she said, you have got to get to work. And there are

necessities that you have got to have.

She did not even say: pay your credit cards off, which surprised

me. She said we are in a position where you do not want to get

to a point where you cannot do the things that you need to do to

survive, basically. And I thought that was a very, very, very, very,

very sad commentary. Because it seems to work against the very

reason why the stimulus package—I am not saying that she was

wrong. She is probably right. But it just shows you—basically what

she is saying is that folks are up against the wall, so do not think

20

you are going to go out there and buy that new purse with that

money. That would be a major mistake.

Do you have any closing statements? I do not want to leave you

hanging out here.

Commissioner Hall. No. Just that I appreciate the opportunity

to talk about the data this morning. Thank you for having me.

Representative Cummings. Well I just want you to know we

appreciate you, Mr. Rones, Mr. Horrigan, and thank you.

We will call our next witnesses: Professor Rebecca Blank, and

Ms. Christine Owens, and Dr. Lowell Gallaway.

Good morning everyone.

Dr. Blank. Good morning.

Representative Cummings. Let me introduce our witnesses,

and I want to thank you all for being with us. You all were here

to hear all the testimony?

Dr. Blank. Yes.

Dr. Gallaway. Yes.

Dr. Owens. Yes.

Representative Cummings. That is helpful. Professor Rebecca

Blank is the Henry Carter Adams Collegiate Professor of Public

Policy at the University of Michigan. She is also professor of economics, and the co-director of the National Poverty Center at the

Ford School.

She is currently on leave as the Robert V. Kerr Visiting Fellow

at the Brookings Institution. She is the author of ‘‘Working and

Poor: How Economic and Policy changes Are Affecting Low-Wage

Workers,’’ and ‘‘Measuring Racial Discrimination.’’ Professor Blank

graduated Summa Cum Laude with a B.S. Degree in economics

from the University of Minnesota, and received her Ph.D. in Economics from the Massachusetts Institute of Technology.

Dr. Christine Owens is the executive director of the National

Employment Law Project, an organization engaged in research,

education, and advocacy on behalf of low-wage, unemployed, immigrant and other disadvantaged workers. Dr. Owens previously

served as director of public policy at the AFL–CIO. Dr. Owens

graduated Phi Beta Kappa with a B.A. from the College of William

& Mary, and received her Juris Doctorate from the University of

Virginia School of Law.

Dr. Lowell Gallaway is distinguished professor of economics at

Ohio University. Dr. Gallaway’s most recent book is ‘‘Out of Work:

Unemployment and Government in 20th Century America.’’ Dr.

Gallaway received a B.S. in economics from Northwestern University, his M.A. from Ohio State University, and his Ph.D. from the

Ohio State University.

Professor Blank, you may proceed.

STATEMENT OF DR. REBECCA M. BLANK, PROFESSOR,

UNIVERSITY OF MICHIGAN, ANN ARBOR, MICHIGAN; A

ROBERT V. KERR VISITING FELLOW, THE BROOKINGS INSTITUTION, WASHINGTON, DC

Dr. Blank. Thank you, Congressman Cummings. It is an honor

to be here, and I appreciate the chance to talk about the labor market. There is much current discussion of recession and a wide variVerDate 11-MAY-2000 09:23 Nov 21, 2008 Jkt 042514 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 C:\DOCS\42514.TXT DianeA PsN: DianeA
21

ety of economic indicators are turning downward, yet the unemployment rate remains relatively low.

I want to argue this low unemployment rate is somewhat misleading and that we actually should be thinking in a different way

as we compare it to earlier unemployment rates.

Let me quickly review some of the indicators of problems in the

current labor market. We have been discussing them in the last

panel.

First of all, there has been a marked slowdown in economic

growth.

Secondly, wage growth has slowed over the last 6 months.

Thirdly, unemployment is quite high among a number of high

risk groups. Whether you look at young workers, workers of color,

or less skilled workers, their unemployment rates are higher now

than they were at the beginning of the recession of 2000–2001.

Fourthly, indicators of labor market slackness are at high levels.

We have already discussed the very high level of long-term unemployment. Indicators of marginal attachment of involuntary parttime work are also very high. So the share of the work force that

is involuntarily employed part-time, that is marginally attached, or

that is generally unemployed, is at 9 percent, which is very high.

Fifth and finally, coming from Michigan I have to note that some

areas of the economy are very clearly in recession. Michigan’s unemployment rate at the end of 2007 was 7.6 percent. So that leads

us back to our starting question: If all of these problems are so bad,

why is the unemployment rate so low?

Most important in answering that question is to look at the shifting age distribution of the civilian labor force. As the Baby Boom

Generation has aged, the share in workers in older age groups has

steadily grown while the share of younger age groups has fallen.

This has the effect of lowering the overall unemployment rate because older workers tend to have lower unemployment rates. In

fact, unemployment is higher among every age group of worker in

January 2008 compared to the beginning of the 2001 recession, and

higher among most groups compared to the beginning of the July

1990–91 recession, even though overall unemployment is lower.

If you do a simple calculation where you take unemployment

rates by age group and weight them by the earlier labor force composition, you find the unemployment rate actually goes up by half

a point if we compare it to July 1990, the beginning of that recession.

In short, the shifting age distribution in the population should

change our expectations about what constitutes high versus low

unemployment. The same unemployment rate in January 2008 signals a greater problem than it did in earlier years.

There is another effect depressing unemployment rate, and that

is the rising share of young men in jail or prison. I suspect you saw

the report last week that 1 out of every 100 adult Americans are

now in prison.

Our labor force statistics are based on civilian noninstitutionalized persons. They exclude the Armed Forces. They exclude people

in jails and prisons.

I have done a very simple simulation in which I have added back

in the Armed Forces. They are all employed. And made some reaVerDate 11-MAY-2000 09:23 Nov 21, 2008 Jkt 042514 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 C:\DOCS\42514.TXT DianeA PsN: DianeA
22

sonable assumptions about what the jail population would look like

if it were out in the work force. That is a population obviously that

has been growing and coming out of the civilian labor force into

jail, and that has been depressing our unemployment numbers.

It turns out that if you take account of the Armed Forces and of

people in prison, unemployment rates would be higher. They would

be substantially higher among young men, and very much higher

among young Black men and young Hispanic men who are disproportionately affected by this.

In short, by expanding the prison population we have removed

more and more young men from our labor market count. This reduces aggregate unemployment rates and makes the unemployment rate look better than it might otherwise.

Finally, if we want to understand why unemployment rates are

low right now, there is one other very important comment to make.

Unemployment rates and employment changes are lagging indicators of an economic slowdown. Unemployment rates are typically

low when a recession begins. They rise during a recession, and they

often peak after the recession has ended.

Hence, unemployment rates are not a good indicator of whether

an economy has entered recession. In fact, if you look at the periods of recession versus unemployment, you can see unemployment

peaking after the recession. We have actually put extended benefits

on in both of the last two recessions after the recession ended. We

waited so long that we were past the end of the official recession.

Because unemployment rises slowly, the political impetus to

enact extended benefit legislation occurs later once unemployment

rates are higher, and indeed that is why we have delayed putting

on extended benefits in the past.

If you believe the U.S. economy is entering a serious economic

slowdown, unemployment rates are likely to increase steadily over

the months ahead. Should we enact extended benefits now? Or, as

in past recessions, wait for the unemployment rate to rise further?

Even adjusting for population shifts, the unemployment rate is

still lower than it was when extended benefits were put in place

in past years. That might argue for waiting. There are a variety

of people, however, who would argue—myself among them—that

we waited too long in the past periods.

The unusually high rates of long-term unemployment in the current economy suggests a growing share of the unemployed who receive unemployment benefits will exhaust them without finding a

job. That argues for moving faster, and I would personally recommend enacting extended benefits now, given the very high rate

of long-term unemployment.

Only time will tell if our current economic slowdown leads to

very rapid rises in unemployment rates over the next several

months. It is certainly true the labor market looks like it did at the

beginning of recessions in past history.

As with the rest of the economy, however, there are a good number of warning signals out there. I am very struck by the high

share of the long-term unemployed and the very high number of

people who are discouraged or involuntarily employed only parttime.

23

For those who are actively seeking work, the search is likely to

be long in the current economy. Thank you.

[The prepared statement of Dr. Blank appears in the Submissions for the Record on page 67.]

Representative Cummings. Thank you very much.

Dr. Owens.

STATEMENT OF DR. CHRISTINE OWENS, EXECUTIVE DIRECTOR, NATIONAL EMPLOYMENT LAW PROJECT, WASHINGTON, DC

Dr. Owens. Thank you, Congressman Cummings, and thank you

for inviting us to testify today.

The issue of today’s hearings are of special concern to the National Employment Law Project, which for decades has helped unemployed workers get the unemployment benefits they need and

that they have earned, and has worked with Members of Congress

and allies in the labor movement and elsewhere to preserve the

Unemployment Insurance Program.

My remarks today focus on two areas: The record rates of longterm unemployment; and an answer to your question to the Commissioner about what we need to do, the need to extend unemployment benefits to stimulate the economy and provide income support to the nearly 3 million workers who will run out of regular

state benefits this year.

Long-term unemployment has remained high throughout this recovery. For 31 consecutive months beginning in November 2002,

more than 20 percent of jobless workers had been unemployed for

at least 6 months.

Similar long-term unemployment rates prevailed for only 23

months during the 1990s recovery, and only 18 months in the

1980s.

The share in number of long-term unemployed workers are greater now than when the last two recessions began. The long-term unemployed are 17.5 percent of jobless workers today, compared with

11.1 percent in March 2001, and 9.8 percent in July 1990.

Last month nearly 1.3 million workers had been unemployed for

at least 6 months, roughly double the 696,000 in 2001, and 688,000

in 1990.

Unemployment spells are longer now. The average length of unemployment was 16.8 weeks last month, but only 12.6 weeks in

March 2001, and 11.9 weeks in July 1990.

Long-term unemployment has not fallen to pre-2001 recession

rates as it has in previous recoveries, nor will it do so soon. Continuing benefit claims now exceed 2.8 million, the highest level

since Hurricane Katrina. This means far more workers will be exhausting their benefits in coming months.

Persistently high long-term unemployment underscores the urgent need to extend jobless benefits to provide a quick jolt to the

economy, and critical support for working families and communities suffering in the downturn.

Three million long-term unemployed workers will exhaust their

regular State benefits this year, and these benefits average only

$285 a week. Thirty-seven percent of these long-term unemployed

24

workers are older than 45, though workers in this age group are

only 27 percent of the unemployed generally.

Similarly, African Americans are 21 percent of the unemployed

generally, but 28 percent of the long-term unemployed. And while

long-term unemployment spreads across industries, manufacturing

workers are a slightly larger group of the long-term unemployed

than of jobless workers generally.

Unemployment benefits are also recognized widely as one of the

most effective means to stimulate the economy quickly and help

avoid or ease recessions. Benefits flow immediately to workers who

need them and who will spend them.

A major study of five previous recessions found that at their peak

jobless benefits saved an average of 130,000 jobs on an annual

basis, and every dollar spent boosts GDP by $2.15. This is because

dollars are quickly pumped back into the economy and because

maintaining jobless benefits boosts consumer confidence, which encourages consumption, the backbone of our economy.

Extending benefits now may also help mitigate the foreclosure

crisis, a problem this Committee addressed only yesterday. Unemployment magnifies the risks that workers will lose or leave their

homes while unemployment benefits provide a cushion to help

workers and their families stay put and preserve communities.

A 2003 Peter Hart survey of unemployed workers found 1 in 4

had to move to other housing, or move in with family or friends in

response to unemployment. However, a national study found that

unemployment benefits actually reduced the likelihood workers will

be forced to sell their homes by almost half. Thus, an extension

may help mitigate the housing crisis.

Finally, Congress must enact a temporary extended benefits program because the current Federal program is so outdated in how

it measures unemployment, not a single State qualifies for extended benefits now. Not even Michigan, which as Dr. Blank has

noted, has had unemployment above 7 percent since August 2006.

Over the last 2 months the economy has lost 85,000 jobs. Nearly

half a million people have dropped out of the labor force. And involuntary part-time employment has grown by over 200,000 workers.

The economy is failing long-term unemployed workers. As Dr.

Blank has testified, Congress should enact an extension now and

not wait until well into or after a recession when the unemployment rate increases substantially.

The long-term unemployed want to work, but the economy is not

working for them. By extending benefits now, Congress can and

should help these workers and the economy overall.

Mr. Chairman, I ask that our written testimony be entered into

the record.

Representative Cummings. So ordered.

[The prepared statement of Dr. Owens appears in the Submissions for the Record on page 72.]

Representative Cummings. Thank you, very much.

Dr. Gallaway.

25

STATEMENT OF DR. LOWELL E. GALLAWAY, DISTINGUISHED

PROFESSOR OF ECONOMICS, OHIO UNIVERSITY, ATHENS,

OHIO

Dr. Gallaway. Thank you.

Representative Cummings. Would you get closer to the mike,

Dr. Gallaway, so we can hear you?

Dr. Gallaway. Thank you.

Representative Cummings. I don’t know whether someone

can——

Dr. Gallaway. Is that better?

Representative Cummings. That is much better. Thank you.

Dr. Gallaway. I am a mumbler anyway, so thank you for reminding me.

I must say, it is a pleasure to be back at the Committee. I sat

in employment hearings in the fall of 1982 as a staff member—in

July 1992 as a staff member—and I am back as a witness. I am

struck by one thing: The rhetoric of the Committee hearings is almost identical. In the immortal words of that great American philosopher, Lawrence P. Berra, sometimes called Yogi, ‘‘It’s deja vu

all over again.’’

Now to proceed with the testimony. As you can see from the

cover sheet, Congressman, this testimony is the product of a joint

effort between my colleague, Richard Vedder and myself.

I begin as follows:

Our message today is quite straightforward. Namely, that it

would be very unwise to return to an activist short-run

contracyclical macroeconomic policy. A more detailed argument for

this position is provided in a set of extended remarks that we ask

to have incorporated in the hearing record.

[See, ‘‘A Brief History of Unemployment in Post-World War II

America,’’ in the Submissions for the Record on page 85.]

For now we will provide a summary description of the behavior

of the American unemployment rate beginning with 1948. For this

purpose we call your attention to the graphic appended to this

statement. It describes the 10-year average unemployment rate for

six decades beginning with 1948–1957, and concluding with 1998–

2007.

[See chart entitled, ‘‘National Unemployment Rate: Ten Year Average (1957–2007),’’ in the Submissions for the Record on page 84.]

In the initial decade, unemployment averaged 4.3 percent, while

the most recent period shows an average unemployment rate of 4.9

percent. Thus, there is only a modest difference between the early

and late years.

Far more interesting, though, is what happened in the intervening decades. Over the period 1958–1967, the average unemployment rate increased to 5.3 percent. In the years starting with 1968

and concluding with 1977, it increased to an average of 5.7 percent.

Next in the interval 1978 to 1987, it further increased to an average of 7.4 percent. These three decades span a period in which the

basic philosophy of policymakers was an activist one. Perhaps the

quintessential statement of the attitudes of the time was provided

by John Kenneth Galbraith in 1982 testimony before this very

Committee when he remarked as follows:

26

*See Appendix A in the Submissions for the Record on page 90.

Persistent in the belief of the present administration is the notion that economic

recovery and improving unemployment are an autonomous tendency of the system.

There is no such autonomous tendency. Recovery is not the work of kindly gods with

a special commitment to the free enterprise system. It is alas the affirmative accomplishment of man and woman.

In the years that followed, though, disenchantment with the activist approach became widespread, and in the years 1988 to 1997

the average unemployment rate fell to 6.0 percent, presaging a further decline to the most recent decade’s 4.9 percent.

Obviously I think we are implying that the recent declines in the

10–year average of unemployment rates are a product of a turning

away from an activist policy approach. Is this perhaps too simplistic? We think not. Our view is based on the extended remarks

that we have asked to be included in the hearing record.

Specifically, we refer you to a technical appendix to those remarks which consists of extracts from an article published in a refereed academic journal.* This article concludes, among other

things, that:

One, cycles in the unemployment rate are the result of shocks in

the labor market that produce discoordination;

Two, these shocks are random in a statistical sense and therefore

cannot be successfully forecast;

Three, about 40 percent of the effects of the random shocks are

eliminated by an endogenous correction mechanism;

Four, assuming that economic policymakers recognize the shocks

immediately and were able to exactly compensate for them, the result would be a less stable labor market and higher average unemployment rates; and

Five, therefore short-term macroeconomic contracyclical policy is

counterproductive.

Now based on these premises, we find it disturbing that there is

much talk of a return to a philosophy that deliberately accepts

higher inflation in an attempt to stimulate the economy.

This is the language of the late 1950s and the 1960s, which ultimately led to 11 consecutive years of increase in the 10-year moving average of the unemployment rate. In the last 100 years, this

is surpassed only by the 13-year runup of the average unemployment rate that embraces the Great Depression of the 1930s.

[See Chart A entitled, ‘‘National Unemployment Rate: Ten Year

Moving Average (1957–2007) in the Submissions for the Record on

page 88.]

Contrast that with what happened when we turned away from

emphasizing short-run contracyclical policy in the early 1980s, in

an act of hubris economists like to refer to fine-tuning the economy.

We have just now in 2007 concluded the 23rd consecutive year

of decline in the 10-year moving average of the unemployment rate.

That is almost twice the length of the second longest period of decline, 12 years, which accompanied the recovery from the Great Depression and World War II.

Representative Cummings. Mr. Gallaway, I am going to have

to ask you to sum up. I have let you—I have let all the witnesses

actually go about 2 minutes over——

Dr. Gallaway. I have five lines left, sir.

27

Representative Cummings. Oh, wonderful.

Dr. Gallaway. I am just about there. I am almost home. To conclude our testimony, we offer two bits of advice to the formulators

of national policy.

First, do not repeat the errors of the past.

Second, do not destroy the good that has emerged in the last

quarter century in a futile pursuit of an unattainable perfection.

We thank you.

[The prepared statement of Dr. Gallaway and Dr. Richard K.

Vedder appears in the Submissions for the Record on page 82.]

Representative Cummings. Thank you. And I want to thank

all of you. I just have a few questions.

Commissioner Hall has testified that, while sustained job losses

indicate a recession, the reality is that unemployment as a lagging

economic indicator just means that if history is any guide, we

should not see large increases in job losses or spiking unemployment until we are deeply into a recession.

I would like you to walk me through, then, how the evidence you

have presented on the state of the labor market and the unemployment insurance system indicates that the American labor market

is faring poorly, and what we can do about it.

Professor Blank, and Dr. Owens, you both testified that we

should not be looking to just the unemployment rate to illuminate

how difficult it is for people to find work. You both pointed to the

share of the unemployed who are long-term unemployed as a different indicator to examine.

Based on the chart in Professor Blank’s testimony, it appears

that it is common for the economy to experience a high level of

long-term unemployment at the end of the recession, but is there

a recent precedent for a situation like we are seeing today with

high levels of unemployment at the start of an economic slowdown?

[For chart referred to, see ‘‘Figure 3.—Long-term Unemployment

as a Percentage of Total Unemployment, January 1979–January

2008’’ in the Submissions for the Record on page 69.]

Dr. Blank, and then Dr. Owens.

Dr. Blank. The current period is historically unprecedented. To

have had as high a rate of long-term unemployment over this past

year when the economy was slowing but clearly not in recession is

simply not something that we have seen before. It is one of the reasons why I think I would be less cautious in my decisionmaking

about things like extended benefit programs.

A substantial share, 1 in 5 of the current unemployed have already been unemployed more than 26 weeks, and many people who

are collecting unemployment insurance therefore have already run

out of their unemployment insurance.

That is just very, very high and it suggests that there are other

things going on here. People are leaving the labor market at a

slightly higher rate perhaps. You have more labor market problems

than the unemployment rate alone would lead you to believe.

Representative Cummings. Dr. Owens.

Dr. Owens. Well, Mr. Cummings, the Commissioner himself

said that this was an unusual situation to be entering a downturn

with long-term unemployment being at such a high rate relative to

overall unemployment.

28

And in fact by the time we entered the past two recessions, longterm unemployment had dipped to a share of about 10 percent of

overall unemployment. Now it is up closer to 20 percent. I think

it is about 18 percent. And that really has not changed.

One of the things I did not talk about, but I think today’s job

numbers force us to talk about, the fact is this economic recovery

has been lousy. It took over 3 years for the economy to regain the

number of jobs that we had had when we entered recession in

March 2001, over 3 years. That was unprecedented.

Then we had a couple of years of relatively good job growth, but

in 2006 we had fewer jobs on average each month than we had had

in 2005; in 2007 we had fewer jobs on average than in 2006; and

so far in 2008 we are losing jobs. So there is a reason that people

are staying unemployed longer. There are no jobs for these workers. This is an unprecedented situation, and Congress simply cannot afford to wait this time until after the levies have broken to

take care of the flood.

Representative Cummings. You know it was very interesting

listening to the Commissioner when he talked about the fact that

we have got these 70 million people who are—I don’t know what

words you want to use to describe them—but they are people he

said that were out of the job market, they’re students, you heard

his testimony, and I am just trying to figure—I mean, did you

agree with that? He acted like there were a lot of people who just

are not really that interested in working.

Dr. Blank. He was talking about the people in the population

who announce themselves as not looking for work. And a good

number of them really aren’t looking for work. As he said, they are

students, they are retired, they are staying home with the kids,

and that is where they want to be right now.

But what I find disturbing is the number of people who are what

the Bureau of Labor Statistics called ‘‘marginally attached.’’ They

are not currently looking for work, but they have been recently

looking for work and if you ask them do you want a job, they say,

‘‘Yes, I want a job, but there are so few jobs out there I have

stopped looking.’’ And that number is really quite high right now,

as is the long-term unemployment number, and it does suggest

that you cannot assume all 70 million are happy being out of the

labor market. Clearly the lack of jobs is increasing the number of

discouraged workers.

Representative Cummings. I think he also talked about—and

this is something that I found very interesting. The Commissioner

mentioned it, but I saw it in the—well, I see it in my own District

where you have got people who, if they had some benefits they

could hold onto their houses. But because they do not have the benefits and they cannot find a job, I mean they get hit probably two

or three times.

The price of food, and gas, and whatever. They are losing their

house. And they do not have benefits. That is a combination for

homelessness. And I am just trying to figure. I mean does that

present a special kind of situation? Do you follow me? I mean, you

make the argument for the extension of unemployment benefits.

You say let’s do it now. Let’s not wait till later. I guess the pattern

has been to wait till later. And when later comes, a lot of damage

29

has been already done and I guess it becomes very difficult for that

person who at first may have been able to, with a reasonable

amount of money, get back to level footing, or sure footing, now it

is almost like they are in quicksand. Is that a pretty good description?

Dr. Blank. I very much agree with you, Mr. Cummings. I think

you are right about that. There was a study by Professor Jonathan

Gruber at MIT, one of the very well known microeconomists working on these issues, done several years ago, so it is based on historical data, showing that persons who are not able to receive unemployment insurance when they became unemployed had their consumption fall by one-quarter.

Those who received unemployment insurance found their consumption fell by less than a third of that, by only 7 or 8 percent.

Unemployment clearly causes pain to these households, but the absence of any safety net at all makes it much, much worse. And the

foreclosure problems and the housing issues could cause, as you

say, damages from which a family really cannot recovery from easily at all, even when they find the next job.

Representative Cummings. Do any of you think we are in a

recession now?

Dr. Blank. I am not the official person who lists numbers, but

I would be very surprised if in another several months we have not

two quarters of negative economic growth, right?

Representative Cummings. Right.

Dr. Blank. I would be very surprised if we do not have negative

economic growth the first quarter of this year. You know, my guess

is it is highly likely that this will turn out to be a recession. I am

an economist. I have to give you a probability.

Representative Cummings. I understand. I understand. You

are not in the position that the Commissioner was in. He said he

can’t——

Dr. Owens. I’m a lawyer.

Representative Cummings. I’m sorry?

Dr. Owens. I said, I’m a lawyer. I will answer.

Representative Cummings. OK.

Dr. Owens. I think from the standpoint of workers, we are in

a recession. Wages are down relative to inflation. More than 7 million people are officially unemployed, but that vastly undercounts

the number of people who want to work, or who are underemployed.

And as we have talked about most of the morning, the incidence

of long-term unemployment is unusually high and there is just no

hope on the horizon for many of these workers because of the job

market.

So from a worker’s standpoint, the economy is in recession.

Representative Cummings. Dr. Gallaway, do you have a comment?

Dr. Gallaway. Well, I would be reluctant to forecast. It has

taken me 50 years——

Representative Cummings. I can’t hear you.

Dr. Gallaway. It has taken me 50 years as an economist to

learn this. We cannot forecast worth a damn. And I am not about

30

to forecast whether we are going to have a recession. It could happen. It might not.

The signals at this point I would say are mixed. But I am not

foolish enough to try to offer a specific forecast. You cannot do

short-term economic forecasting.

Representative Cummings. I understand. You know, Professor

Blank made a very interesting point that some parts of the country

may already be in a recession. I understand that unemployment is

quite high in Michigan and other States. Are we also seeing an increase in the long-term unemployed in these States?

Dr. Blank. Yes, I think Michigan has had a high long-term unemployment rate for a number of years. Michigan essentially never

came out of the recession of the early 2000s.

Representative Cummings. And so I guess if you layer what

is happening now on what you just said, you are going to have a

lot of people in trouble.

Dr. Blank. Yes, you have a lot of people in trouble in Michigan.

And they have been in trouble for some time period.

Representative Cummings. And it is going to get worse.

Dr. Blank. That is certainly the way things look right now.

Representative Cummings. So what, what—I mean, if you

were brought into the White House and President Bush says, you

know, Dr. Blank, I saw you the other day and I was very impressed

with your testimony, tell me what we can do to turn this around,

what would you say?

Dr. Blank. So I do agree with Commissioner Hall that we have

done a number of things that we need to do. The Federal Reserve

is clearly taking steps to try to adjust monetary policy in a way

that will stimulate the economy, and I think the first stimulus

package that was passed by the Congress is certainly very helpful.

I was surprised at the reluctance to not go a little bit further in

some of that stimulus package. I would certainly have put unemployment benefits in it. I personally would probably have looked at

trying to do something to increase food stamps, which gets assistance to some of the very poorest people in this economy and guarantees you it will all be spent, if you want to increase consumption.

So I certainly would want to look at another package. I would

tell you that if you are going to do this, you need to do it very, very

quickly. The longer you delay, the more likely, that you pass this

after the fact, and that you don’t get the immediate effects that you

really want to get.

Representative Cummings. It seems that one of the arguments that was made against food stamps was that it was only, if

I remember correctly, adding 10 cents a day. Did you hear that?

I know that was one of the arguments that was made, that the proposal would have added 10 cents a day. So I think they were trying

to figure out, OK, what do we do to have maximum impact. And

that was the argument that I heard over and over. Had you heard

that?

Dr. Blank. Yes. I mean, one could of course always do more and

propose a slightly bigger package. As I said, the advantage of doing

something that focuses on people who are the most disadvantaged

is obvious. They are the people who are hurting the most. They are

the people in many places being affected the most by the rising

31

prices. And they are people who you can promise will spend all of

this money because they need it today to pay the rent and to pay

for food.

Representative Cummings. With regard to this whole situation with housing and this double whammy where people are—

there was probably about a triple, quadruple whammy—you have

got people who are in houses where they now are facing balloon

payments. The house is worth less than what they bought it for.

They probably in many instances may have one wage earner as opposed to the two they used to have.

They have cut, and cut, and cut their budget as best they could.

They have gotten rid of the SUV for a smaller used car, but still

the gas prices are steadily going up and they have got to get to

work.

It just seems that at some point, they’ve got to hit a brick wall.

And I listened to what you said you’d say to the President, but

what about the people that I just described?

Apparently, in places like Michigan and Ohio, there are quite a

few of them.

And there’s a reluctance, with regard to the suspension of foreclosure efforts, on the part of the Congress and a lot of other people, so what about them?

Dr. Blank. You know, particularly those who have been hit by

the——

Representative Cummings. Or do we say—and I’ve got to

throw this in—or do we say that there are always going to be some

people that are going to be left behind, and the sad problem is that

not—it’s not going to be a few, but there are going to be a whole

lot.

There are some people that make the argument, well, that’s just

the way the cookie crumbles, and sadly, there are going to be people that are going to do poorly.

So?

Dr. Blank. It is a choice as to how much you want to provide

assistance to people in a very bad economic situation. And clearly,

at times, we’ve chosen to provide more assistance, and at some

times, we’ve chosen to provide less.

And when you provide less, you know, more people face many

more difficult choices. And even if you don’t worry about the parents in those situations, I think you’ve got to worry about the kids

and what implications it has for them.

One of the worst things that can happen to children is multiple

relocations during their childhood where they shift schools and go

into different classrooms in the middle of the year. The sort of

housing problems we’re seeing are stimulating exactly that sort of

churning of the residential labor market.

I’m entirely in sympathy with your views, sir, that we’re in a

very difficult situation, and we should be trying to do more to answer the questions that people like this should be asking us.

Representative Cummings. Now, Professor Owens, you noted

that African American workers are much more likely to be longterm unemployed, compared to white workers. Can you expand on

why you think this is the case, and what would you conclude that

32

extending unemployment benefits to the long-term unemployed,

disproportionately helps African Americans?

Dr. Owens. Well, Mr. Cummings, African American workers are

21 percent of all unemployed workers, but they are 28 percent of

the long-term unemployed workers, so they are over-represented in

the long-term category, compared to unemployed workers overall.

I suspect that part of this, although we haven’t done these cross

tabs, but I suspect that part of this has to do with what’s happened

to manufacturing, because manufacturing was the source of good

middle class jobs for many African American workers, and they

have been very badly hurt by our loss of well over 3 million manufacturing jobs in the last 5 or 6 years.

They probably are also concentrated in some jobs that are just

more vulnerable in terms of ease to replace workers with technology or the like, or, in many cases, may have somewhat, for

whatever reasons, some more tenuous connection to the work force,

to a particular employer, than some of their colleagues, less seniority or what have you.

But I would imagine that a big reason is what’s happened to the

manufacturing sector. Certainly, given their concentration within

the ranks of the long-term unemployed, extending unemployment

benefits is going to help African American families substantially.

Representative Cummings. Let’s talk about women. I know

that we’ve seen phenomenal changes in our labor market over the

past generation, most importantly, the rise in women’s labor force

participation.

Do you think that this might be affecting the labor market indicators in some way? For example, to what extent do unemployed

people who might have once dropped out of the labor force, say, because they had an unemployed spouse and their contribution was

not as important to the family, now have to continue searching for

work, for economic reasons.

Dr. Blank, and then Dr. Owens.

Dr. Blank. That isn’t showing up very much in the numbers. As

you say, the overall unemployment numbers actually are still relatively low.

I’m particularly concerned about the very low-skilled women

who, at another point in time, would have been on welfare programs, who basically don’t have that option and are out there

working.

And if they lose their job, there isn’t another. They’re typically

single mothers, and it’s them and their children on their own.

So, you know, the concern is about what type of jobs are available and are they able to find the next job. Another issue with that

population that’s of particular concern is that many of them don’t

seem to have access to unemployment insurance when they lose

jobs. They haven’t worked long enough; they haven’t earned enough

money, so that extending benefits doesn’t help them at all.

They are a group for whom a food stamp extension would help

a great deal.

Representative Cummings. OK.

Ms. Owens.

Dr. Owens. Congressman Cummings, I think that while many

women and maybe most women work because they want to, the

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hard reality is that women are also working because they have to.

For decades, the only way—since the late 1970s, I believe—that

family incomes sort of were retained at the level they had been in

the late 1970s, is because women, more and more, were working

and they were working more hours.

In terms of the long-term unemployed, roughly 57 percent of

them are men; the other 43 percent would be women, but as we

are now beginning to see job loss more broadly, and particularly in

the private services sector, I wouldn’t be surprised to see the numbers of long-term unemployed women and the share, grow as well.

Representative Cummings. Finally, let me ask you this: Are

there other indicators we should be looking to, in order to understand the slackness in the labor market?

In particular, I have noticed that during this economic recovery,

the employment rate never returned to its pre-recession peak. If

the employment rate had recovered to its pre-recession peak of 64.7

percent, there would be an additional 4.2 million people at work

today.

But this is not the case. Can you tell me whether you follow the

employment rate and what it means that it remains so low, relative to the business cycle of the 1990s?

Dr. Blank. I have not looked at that very closely. It is true that

it is down somewhat, and it depends on what your base population

comparison is.

A little of that is people staying in school longer; a little of that

is people retiring earlier, and, you know, some of that’s good; some

of that’s bad, right?

I can’t answer much beyond that. You asked about other labor

market indicators, and I would say that the other thing that I

would watch very closely—and you asked Commissioner Hall about

this a little bit—is, it’s one thing when a few sectors are showing

employment losses; it becomes much more troublesome when you

see employment losses across a whole spectrum of industries.

Today’s employment report is particular striking because there

are virtually no sectors that are showing any sort of employment

growth, and that’s really suggesting, as you said, there is not any

good news out there. It’s affecting all workers across the entire

spectrum, and that, again, is quite consistent with an idea that we

really are in the very beginnings of a significant downturn.

Representative Cummings. Are there—Professor, is there a

situation where, say, you look at the different types of employment

and then you say, well, with construction, I kind of understand

that; then you go to another one and you say, well, that’s not so

bad, but, I mean, it’s still a problem.

But then you’re getting to an area where it sort of creeps into,

and then you start saying, wait a minute, this is—I think we’re

running into problems. And if that is the case, would the service

sector be one of those where the yellow lights and red lights are

going off?

Dr. Blank. Yes, absolutely. It’s not.

Representative Cummings. And why is that, Professor?

Dr. Blank. It’s because the service sector is not very cyclical.

Manufacturing and construction are very cyclical; they move up

and down rapidly. You know, it’s not surprising to see that they

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often turn earlier than other sectors when you go into a recession,

and they turn earlier when you come out of it.

But the services tend to be less cyclical—you know, people always need their hair cut; there are certain things like that, you

know—say, education is a very noncyclical industry.

If you start seeing job loss or jobs stalling, no employment

growth in those areas, it’s really a sign of, as you say, of just very

broad-spread problems in the economy.

Representative Cummings. And so it’s just not the fact that

people are making less money; they are—well, they’re making less

money because they don’t have jobs. But they’re making hard

choices.

Dr. Blank. Yes.

Representative Cummings. So, when you see the barber complaining that he’s not making very much money, or the—I guess,

would restaurants fall into that area?

Dr. Blank. Yes, retail trade.

Representative Cummings. And if they have to lay people off,

you know you’re really running into some problems.

Dr. Blank. Yes.

Representative Cummings. And I would imagine that, as in

my district, I hear people say that they don’t go to do those things

as much anymore; one of the things they are afraid to even get into

their cars, because they can’t afford the gas, so they don’t go to the

shopping centers as much, and the next thing you know, you’ve got,

I guess, whole groups of people who are harmed; is that it? Is that

how it works?

Dr. Blank. I agree entirely.

Representative Cummings. Anything else?

[No response.]

Representative Cummings. I want to thank you all very much

for being with us today. Thank you for waiting around; we really

appreciate it.

This hearing is called to a close.

[Whereupon, at 11:21 a.m., the hearing was adjourned.]

(35)

Submissions for the Record

PREPARED STATEMENT OF REPRESENTATIVE ELIJAH E. CUMMINGS

Chairman Schumer and Vice Chairwoman Maloney are not able to attend today’s

hearing—but I am honored to lead the Committee’s examination of our nation’s employment situation.

The report we received this morning is frankly shocking. The report shows that

our economy lost 63,000 jobs overall in February—but I note that private sector employment fell by 101,000.

At the same time, the unemployment rate fell by .1 percent to 4.8 percent. This

fall in the unemployment rate—which is occurring at the same time as jobs are

being lost—seems to be occurring because people believe that there are no job opportunities for them and they are simply dropping out of the labor force.

Last month, Dr. Hall told us that labor force numbers almost define the existence

of a recession. I am eager to hear what Dr. Hall has to say about our economy given

the terrible numbers we received this morning.

Frankly, I believe our economy stands poised on an uncertain cliff—threatening

to throw our nation into a crisis. Sadly, however, many hardworking Americans

across the country have already entered their own personal crises.

The traditional definition of a recession is two quarters of negative growth. Unfortunately, the difficulty in diagnosing a recession is that its existence can only be

confirmed in hindsight when the data are seen to show that a slowdown has been

definite and prolonged.

As a result, once we know we are in a recession, it’s too late to prevent one.

However, we do not need to recite the litany of familiar data to confirm that our

economy is struggling. One need only look to the millions of families who are struggling—obviously struggling to find jobs, struggling to keep their homes, and struggling to pay for gas and home heating costs.

Foreclosure filings have increased by 75 percent between 2006 and 2007.

According to the Mortgage Banker’s Association, a higher percentage of mortgages

are past due or in foreclosure than at any other time since the Association started

tracking such data in 1979. And many experts fear that the peak in foreclosures

has not yet been reached.

At the same time, nearly 8.8 million homeowners now owe more on their homes

than the homes are worth. Another 41 million homes not facing foreclosure are estimated to be likely to experience declines in value.

Obviously, employment is falling—but for a prolonged period, wages have failed

to keep pace with inflation.

Wage growth also continues to slow, breaking the historic relationship between

increased production and real wage growth.

According to a report by the Joint Economic Committee, since late 2001, productivity has shown an average annual increase of 2.5 percent, but wages have experienced an average annual increase of just 1.2 percent after inflation.

This is particularly disturbing in light of skyrocketing prices for everything from

food to gasoline and heating oil. In January, we saw the consumer price index rise

by .4 percent. Oil prices climbed near $106 per barrel yesterday.

Families are also facing heating costs of more than $2,000 per household this winter—over three times the cost in 2001.

Unfortunately, while we debate the specific status of our economy, the data I just

recited don’t paint the real picture of people whose dreams too long deferred are

now in danger of being completely destroyed.

Every day in my district in Baltimore, I see the desperate look of those who are

watching the homes and the lives in which they invested their money and every

ounce of their energy in danger of slipping from their grasps.

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Our nation needs to do whatever is necessary to create an economy that works

for our citizens.

Congress recently passed a stimulus package to try to help stave off the recession

that may be coming. Although the package will offer some relief to millions of hardworking families, the stimulus package was missing critical provisions addressing

unemployment benefits and food stamps.

Further, the package included nothing to support expanded investments in our

nation—particularly in areas like infrastructure development, where investments

create roads and public transit systems at the same time they create jobs.

Our nation’s top priority must be meeting the needs of our citizens—and investing

in our success—and the recent stimulus package, much like the recent rate cuts by

the Fed, is only a temporary patch.

We cannot continue to keep patching a lagging economy without also addressing

the root causes of our problems—particularly the mortgage crisis.

The American people deserve better—and we can DO better.

PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER, CHAIRMAN

SCHUMER ON JOBS REPORT: ‘‘HOW MANY WAKE UP CALLS DOES THIS ADMINISTRATION

NEED?’’

In response to the Labor Department’s jobs report today, Sen. Charles E. Schumer, Chairman of the Joint Economic Committee, released the following statement:

‘‘How many wake-up calls does this administration need—foreclosures yesterday,

jobs today? The president’s ‘hear no evil, see no evil’ policies on our economy simply

do not work.’’

‘‘The bottom line is that this administration is the owner of the worst jobs record

since Herbert Hoover, and the last 2 months of losing nearly 90,000 jobs secures

that unfortunate place in history. The significant jobs losses in the manufacturing

and construction sectors have continued since the housing market has been in trouble and doesn’t seem to be getting better. But the job losses in the retail sector are

particularly troubling because it indicates that consumer spending, which has driven this economy, has also declined measurably.’’

‘‘It is only a matter of time before consecutive months of job losses, falling home

prices, rising energy prices, and cutbacks in consumer spending lead us to a fullblown recession. It is crystal clear to everyone but the Bush Administration that we

are inevitably heading toward a recession and today’s dismal jobs report is just another warning sign that Washington needs to do much more to help our economy

than it’s done so far.’’

[The Joint Economic Committee, established under the Employment Act of 1946,

was created by Congress to review economic conditions and to analyze the effectiveness of economic policy.]

www.jec.senate.gov

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PREPARED STATEMENT OF REPRESENTATIVE CAROLYN B. MALONEY, VICE CHAIR

Good morning. I would like to thank Commissioner Hall for testifying today on

the February employment situation. I am pleased that we have a second panel to

examine the outlook for the labor market and discuss the plight of the long-term

unemployed.

We continue to seen mounting evidence that a significant downturn in the economy may be underway. A consensus is growing among economists that it may be

too late to avoid the second economic downturn of President Bush’s administration.

The Federal Reserve’s latest Summary of Economic Projections forecasts slower economic growth, higher unemployment, and rising inflation over the coming year.

We’ve already seen signs of weak growth and higher inflation, and now job growth

has stalled. The unemployment rate held steady at 4.8 percent, but 63,000 jobs were

lost last month.

This downturn poses a significant threat to the economic stability of American

families, many of whom never fully recovered from the 2001 recession. Real family

income is actually 2 percent lower now than it was in 2000 and in recent months,

wages have begun to fall. High energy prices, falling home prices, and falling wages

are squeezing American families. With job prospects dimming, many families will

be forced to cut back on spending, further exacerbating the economic decline.

A weakening labor market has made it more difficult for people to get back on

their feet after losing a job. 1.3 million unemployed workers have been pounding the

pavement, looking work for at least 6 months with no success. This is a foreboding

statistic. Less than half as many people were among the long-term unemployed at

the onset of the last two recessions.

Evidence of hidden unemployment is reflected in the continued depressed levels

of the labor force participation rate and falling fraction of the population with a job.

In short, jobs have become harder to find.

A stimulus package is an important first step, but there is more to do to blunt

the effects of this downturn and to get the economy back on track. Providing an extension of unemployment benefits is critically needed. At least 1.3 million workers

will likely exhaust their unemployment benefits in the first half of this year. In the

last five economic recessions, Congress extended Unemployment Insurance to the

long-term unemployed but has yet to do so during the current economic contraction.

I look forward to the continued focus on labor market conditions by this committee.

PREPARED STATEMENT OF DR. KEITH HALL, COMMISSIONER, BUREAU OF LABOR

STATISTICS, U.S. DEPARTMENT OF LABOR, WASHINGTON, DC

Mr. Chairman and Members of the Committee:

Thank you for this opportunity to discuss the February labor market data that

we released this morning.

Nonfarm payroll employment edged down in February (¥63,000), and the unemployment rate was essentially unchanged at 4.8 percent. Private-sector employment

declined by 101,000. Job losses occurred in manufacturing, construction, and retail

trade. Employment growth continued in health care and in food services.

Manufacturing employment fell by 52,000 over the month. Over the past 12

months, this industry has shed 299,000 jobs. In February, employment declined in

motor vehicles, printing, and semiconductors, as well as in wood products and furniture—two housing-sensitive industries. Factory hours and overtime were unchanged.

Elsewhere in the goods-producing sector, construction lost 39,000 jobs over the

month. Construction employment has fallen by 331,000 since peaking in September

2006. Over this period, job losses were concentrated in residential building and in

residential specialty trades; employment in the nonresidential components of construction changed little on net.

In the service-providing sector, retail employment was down by 34,000 in February. Job losses occurred in department stores, auto dealers, and building and garVerDate 11-MAY-2000 09:23 Nov 21, 2008 Jkt 042514 PO 00000 Frm 00041 Fmt 6601 Sfmt 6621 C:\DOCS\42514.TXT DianeA PsN: DianeA
38

den supply stores. Over the past 12 months, retail employment has shown no net

growth. Within professional and business services, employment in the temporary

help industry fell by 28,000 over the month and by 117,000 since the most recent

peak in December 2006.

Health care employment continued to expand in February, rising by 36,000. Employment in food services continued to trend up, although growth in this industry

has slowed in the past 4 months. Most other private service-providing industries

showed little employment change in February.

Average hourly earnings for production and nonsupervisory workers in the private

sector rose by 5 cents over the month and have increased by 3.7 percent over the

past 12 months.

Turning now to the labor market data from the survey of households, the unemployment rate was essentially unchanged over the month at 4.8 percent. A year earlier, the jobless rate was 4.5 percent. Over the year, the number of unemployed persons rose by 544,000 to 7.4 million.

The increase in unemployment over the past 12 months was concentrated among

persons who lost jobs and had no expectation of being recalled. Since February 2007,

the number of these job losers increased by 450,000 to 2.9 million; their share of

total unemployment rose from 35.4 to 39.0 percent. The number of persons unemployed for other reasons, such as voluntarily leaving a job or entering the labor market, showed little change over this period.

In terms of unemployment duration, 35.6 percent of the unemployed had been

searching for work for less than 5 weeks in February, while 17.5 percent were still

searching after 27 or more weeks. These proportions were little changed from a year

earlier.

The number of individuals in the labor force fell by 450,000 in February to 153.4

million, and labor force participation declined to 65.9 percent of the population. The

labor force participation rate has been at or near 66.0 percent since last spring.

The employment-to-population ratio was 62.7 percent in February. This measure

remains well below its recent peak of 63.4 percent in December 2006. Among the

employed, the number of persons working part time who would prefer to be working

full time has been growing. In February, there were 4.9 million such workers, an

increase of about 637,000 from a year earlier.

Among persons not in the labor force, about 1.6 million were marginally attached

to the labor force. The marginally attached are individuals who are not currently

looking for work, but want and are available for work and have searched for a job

sometime in the prior 12 months. The number of discouraged workers, a subset of

the marginally attached who believe no jobs are available for them, was 396,000 in

February, little changed from a year earlier.

In summary, nonfarm payroll employment edged down in February, with job

losses in manufacturing, construction, and retail trade. The unemployment rate was

essentially unchanged at 4.8 percent.

My colleagues and I now would be glad to answer your questions.

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PREPARED STATEMENT OF DR. REBECCA M. BLANK, PROFESSOR, UNIVERSITY OF

MICHIGAN, ANN ARBOR MICHIGAN; A ROBERT V. KERR VISITING FELLOW, THE

BROOKINGS INSTITUTION, WASHINGTON, DC

Chairman Schumer, Ranking Member Saxton, and distinguished members of the

Committee, I appreciate the opportunity to appear before you today to discuss the

labor market. The opinions I will express are my own and not those of the organizations with which I am affiliated.

The unemployment rate has long been used as a common measure of ‘economic

pain’ in the economy. Today, I want to analyze the current labor market situation,

with particularly attention to unemployment.

There is much current talk about recession and a wide variety of economic indicators are signaling a major economic slowdown. GDP growth was below 1 percent last

quarter; credit is tight, even with lower interest rates; and consumer confidence is

falling. This has generated a conversation about whether the Federal Government

should extend Unemployment Insurance benefits beyond their standard 26 weeks.

Yet, the unemployment rate has remained relatively low in recent months, at or

below 5 percent. At least compared with unemployment in the 1970’s and 1980’s,

this does not seem high and is below the unemployment rate where extended benefits were implemented in the past. I want to argue that this low unemployment rate

is somewhat misleading, because the composition of those in the labor market is different than in the past. In fact, there is substantial evidence that the problems of

unemployment are at least as bad now as they were at the beginning of the economic slowdown of the early 1990s or the early 2000s, both recessions when extended benefits were enacted.

CURRENT LABOR MARKET INDICATORS

There are at least five indicators of problems in the current labor market.

First, recent months have shown a marked slowdown in employment growth.

From January 2006 through January 2007, employment grew by 2 percent. Over

this past year, from January 2007 through January 2008, employment grew only

0.2 percent. The number of people employed has actually declined in a few recent

months. Figure 1 shows the annual changes in unemployment from month to

month; the recent slowdown in employment growth is clearly visible over the past

year.

Second, wage growth has slowed over the last 6 months. Figure 2, taken from a

chart constructed by Jared Bernstein at the Economic Policy Institute (Bernstein,

2008), indicates that the annual change in real earnings has been negative since

October. This is due to the combination of very slow growth in nominal wages and

faster inflation, leading to a decline in real (inflation-adjusted) wages.

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Third, unemployment is at relatively high levels among high-risk groups. Table 1

compares unemployment rates in January 2008 with unemployment in July 1990

and March 2001. These were the months that marked the official beginning of the

recessions of the early 1990s and the early 2000s. While I do not know if January

2008 was the first month of a recession, it is interesting to compare unemployment

in January 2008 to unemployment at the beginning of historical economic slowdowns. The top part of Table 1 shows unemployment rates among groups that we

tend to think are most at risk of job loss and long-term unemployment in times of

recession.

The evidence suggests that unemployment in January 2008 was higher among

younger workers than at the beginning of the 1990 or the 2001 recessions. It was

higher among less skilled workers than in 2001 (we only have data on this from

the mid-1990s onward), and higher among black and Hispanic workers than in

2001, but lower than in 1990.

Fourth, indicators of labor market slackness are at high levels. The bottom part

of Table 1 shows three alternative measures of labor market slackness. Overall unemployment rates are higher now than at the beginning of the 2001 recession, but

slightly lower than at the beginning of the 1990 recession. Long-term unemployment

measures the number of workers whose unemployment spell has lasted 27 weeks

or longer. Long-term unemployment is currently quite high, with almost 1 percent

of the workforce in long-term unemployment in January 2008.

Figure 3 shows long-term unemployment as a share of overall unemployment. As

of January 2008, 18.3 percent of the unemployed had been unemployed for more

than a half year. This is substantially higher than in 1990 (at 12.9 percent) or 2001

(at 11.1 percent). This suggests that a substantial fraction of those who lost jobs in

2007 are having serious difficulties binding reemployment.

The standard unemployment rate measures those who actively looked for work.

The Bureau of Labor Statistics also computes a measure of those they call ‘‘marginally attached,’’ which are those who want a job and have recently looked for a job,

but are currently not looking because jobs are so scarce. They also measure those

who are working only part-time because of economic reasons, the so-called ‘involuntary part-time workers.’ If one expands the labor force to include marginally attached workers, and looks at the share who report themselves as either unemployed,

marginally attached, or involuntarily working part-time, this is 9 percent of the

labor force in January 2008 (shown at the bottom of Table 1). In March 2001, the

beginning of the last recession, this number was only 7.3 percent.

Fifth and finally, coming from Michigan, I have to note that some parts of the

country are clearly in recession, even if we are still arguing about whether there is

a national recession. Michigan’s unemployment rate was 7.6 percent at the end of

2007. Seven states had unemployment rates over 6 percent. In these parts of the

country, jobs are scarce and unemployment is a clear economic and social problem.

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Table 1.—Unemployment Rates in Selected Months

Unemployment Rate

Jan–08 Mar–01 July–90

Part l: Selected Labor Market Groups

Young Men, ages 16–19 .............................................................................. 21.8 14.0 15.9

Young Women, ages 16–19 .......................................................................... 14.2 13.5 14.0

Blacks ........................................................................................................... 9.2 8.3 11.4

Hispanics ...................................................................................................... 6.3 6.2 8.0

Workers w/ Less than High School Diploma1 .............................................. 7.7 6.8 N/A

Part 2: Alternative Measures of Labor Utilization

Official Unemployment Rate ......................................................................... 4.9 4.3 5.5

Long-Term Unemployment Rate2 .................................................................. 0.9 0.5 0.5

Total unemployed + marginally attached workers + employed part-time

for economic reasons, as a percent of civilian labor force + marginally attached workers3 ............................................................................. 9.0 7.3 N/A

Source: U.S. Department of Labor, Bureau of Labor Statistics, http://www.bls.gov/home.htm

Notes: July 1990 and March 2001 are the beginning months of the last two recessions, according to the the Business Cycle Dating

Committee of the National Bureau of Economic Research; January 2008 is the most recent month for which data is available. All reported

data are seasonally adjusted. 1Ages 25 and older.

2Share of labor force that has been unemployed for 27 weeks or more.

3Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. (Discouraged workers, a subset of the marginally attached, have given

a job-market related reason for not currently looking for a job.) Persons employed part time for economic reasons are those who want and are

available for full-time work but have had to settle for a part-time schedule.

WHY IS THE AGGREGATE UNEMPLOYMENT RATE SO LOW?

This leads back to our starting question: If the labor market problems are so bad,

why is the overall unemployment rate so low?

Most important is the shifting age distribution of the civilian labor force. As the

baby boom generation has aged, the share of workers in older age groups has steadily grown, while the share in younger age groups has fallen. This has the effect of

lowering the overall unemployment rate because older workers tend to have lower

unemployment rates. Columns 1 through 3 of Table 2 show the unemployment rate

by age group in July 1990, March 2001 and January 2008. Columns 4 through 6

show how the share of workers within each age group has shifted over this time

period. There is a steady growth in the share of older workers and a decline in the

share of younger workers.

It is apparent from Table 2 that unemployment is higher among every age group

of worker in January 2008 compared to March 2001, and higher among most groups

compared to July 1990, even though overall unemployment is lower. This is because

the weights across the age groups have shifted.

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Table 2.—Unemployment Rate by Age and Labor Force Share in Selected Months

Unemployment Rate

(percent)

Share of Labor Force (percent)

Jan–08 Mar–01 July–90 Jan–08 Mar–01 July–90

Ages:

16–19 .................................................................... 18.0 13.4 15.0 4.5 5.6 6.2

20–24 .................................................................... 8.7 8.1 8.5 9.8 10.2 11.7

25–34 .................................................................... 4.9 4.3 5.6 21.6 22.6 28.5

35–44 .................................................................... 3.6 3.4 4.2 22.9 26.2 25.5

45–54 .................................................................... 3.4 2.8 3.3 23.4 22.2 16.1

55+ ........................................................................ 3.2 2.6 3.1 17.8 13.3 11.9

Total Labor Force Share ................................................. .............. .............. .............. 100.0 100.0 100.0

Aggregate Unemployment Rate ...................................... 4.9 4.3 5.5 .............. .............. ..............

Jan–08 Unemployment weighted by May–01 Labor

Force Share ................................................................ .............. 5.1 .............. .............. .............. ..............

Jan–08 Unemployment weighted by July–90 Labor

Force Share ................................................................ .............. .............. 5.4 .............. .............. ..............

Source: U.S. Department of Labor, Bureau of Labor Statistics, http://www.bls.gov/home.htm. Labor force shares by age and weighted unemployment rates are author’s tabulations from BLS data.

Notes: July 1990 and May 2001 are the beginning months of the last two recessions, according to the the Business Cycle Dating Committee of the National Bureau of Economic Research; January 2008 is the most recent month for which data is available. All reported data

are seasonally adjusted.

If you take the age-specific unemployment rates in January 2008 and weight them

as if the labor force looked as it did in July 1990, the unemployment rate in 2008

would be 5.4 percent rather than 4.9 percent, very close to the actual unemployment

rate of 5.5 percent in July 1990. Similarly, the January 2008 unemployment rate

would be 5.1 percent if age groups are weighted by the March 2001 labor force

weights, far above the actual March 2001 unemployment rate of 4.3 percent.

In short, the shifting age distribution in the population should change our expectation about what constitutes low versus high unemployment. Because older workers have lower unemployment rates, base unemployment rates have fallen with an

aging workforce. Hence, the same unemployment rate in January 2008 signals more

problems than it would have in early 1990 or even in early 2001. From the point

of view of any worker who compares herself to her age peers, unemployment is

worse now than at those earlier moments in time.

There is another effect depressing unemployment rates, and that is the rising

share of younger men in jail or prison. I suspect most of you saw the report from

the Pew Foundation last week noting that 1 out of every 100 adult Americans are

now in prison (Pew Center on the States, 2008). Our labor force statistics are based

on civilian non-institutionalized persons. Those in prison are not counted. This particularly affects younger men. Of course, the civilian labor force data also excludes

those in the Armed Forces, all of whom are employed. This also disproportionately

affects younger men.

Rather than working with the civilian noninstitutionalized population, I add

Armed Forces personnel and those in jails and prisons to the population numbers

and add Armed Forces personnel to the employment numbers. I do this calculation

for 2006, the latest year for which all these data are available.

It has hard to calculate an adjusted unemployment rate because we are not sure

how many men currently in prison would be actively seeking work. For a back-oftheenvelope calculation, I assume that 80 percent of those in prison would be in the

workforce if they were not in prison, and that the unemployment rate among these

men would be 25 percent. (This is only slightly higher than the current 21 percent

unemployment rate among young men ages 16–19.) Under these circumstances, the

2006 male unemployment rate would rise from its reported level of 4.6 percent to

4.9 percent.

Of course, most of the men in prison or in the Armed Forces are younger. If I

assume that all of these men are between the ages of 16 and 34, I can look at the

effect on employment-to-population ratios and on the unemployment rate for that

group in the population. Taking account of both the Armed Forces and the large

number of men in prisons or jails, the 2006 employment-to-population ratio among

men ages 16–34 would fall from 72.3 percent to 69.5 percent. Their unemployment

rate would rise from its reported 2006 level of 7.2 percent to an estimated 7.8 percent.

In short, by expanding the prison population, we have removed more and more

young men from our labor market count. This reduces aggregate unemployment

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rates and raises employment shares, since these are often persons who would have

difficulty finding jobs if they were not in prison.

Finally, if we want to understand why unemployment rates look low right now,

there is one more very important comment to make: Unemployment rates and employment changes are lagging indicators of an economic slowdown. Unemployment

rates are typically low at the point a recession begins. They rise during a recession

and often peak after a recession has ended. Hence, unemployment rates are NOT

a good indicator of whether an economy has entered a recession. Figure 4 plots unemployment rates over the past 25 years. The shaded areas indicate periods of recession. In every recession, unemployment rates are low in the first month, and

often peak after the end of a recession.

Because unemployment rises slowly, the political impetus to enact extended benefit legislation often occurs later in a recession, once unemployment rates are higher. Figure 4 indicates that extended benefits have been enacted quite late in past

recessions. In fact, in both the early 1990s and the early 2000s, extended benefits

were enacted after the official end of the recession (but at a time when unemployment rates were still rising.)

If you believe the U.S. economy is entering a serious economic slowdown, unemployment rates are likely to increase steadily in the months ahead. Should we enact

extended benefits now or, as in past recessions, wait for the unemployment rate to

rise further? Even adjusting for population shifts, the unemployment rate is still

lower than it was when extended benefits were put in place in past years. This

might argue for waiting. On the other hand, the unusually high rates of long-term

unemployment in the current economy suggest that a growing share of the unemployed who receive unemployment benefits will exhaust them without finding a job.

This argues for moving faster. Extended benefits can particularly assist long-term

unemployed workers who are having difficulty finding jobs. Certainly waiting until

after a recession has ended to enact extended benefits (as we’ve done in the recent

past) makes little sense. Personally, I would recommend enacted extended benefits

now, given the high rate of long-term unemployment among the jobless.

That said, I cannot end this discussion without a very important caveat. Unemployment Insurance (UI) is received by a minority of the unemployed and the share

receiving UI has been falling in recent years. Only 34 percent of the unemployed

received UI at the end of 2007 (U.S. Department of Labor, 2007). For many of the

unemployed, extended UI benefits will have little effect on their economic situation.

While a recession in the next few months might increase the call for extended benefits, in the longer run, reform of the entire UI program is necessary if you want

more unemployed workers to have access to an economic cushion when they lose

their jobs.

72

CONCLUSIONS

Simply comparing unemployment rates in early 2008 with those in past years can

be misleading. Our expectations about labor market measures should change over

time, as the overall population ages. An aging population typically means lower aggregate unemployment rates because older workers (that is, persons in their 40s

and 50s, not persons in their 60s) tend to be more stably employed. (This is also

one reason why current labor force participation rates are high.) Hence, while aggregate unemployment rates are low, unemployment among each age group is higher

than it was at the beginning of the 2001 recession.

Lower unemployment rates among younger men are also explained by who we

count in the labor force. A growing share of younger men who would have been in

the labor force in earlier years is in prison in 2008. This also reduces the overall

unemployment rate since these men would have had higher unemployment rates if

they were not incarcerated.

Only time will tell if an economic slowdown leads unemployment rates to rise rapidly over the next several months. As with the rest of the economy, however, at this

point in time there are a number of warning signals in the labor market. The pattern of slower employment growth and rising unemployment rates, seen in Figures

1 and 4, looks a great deal like the beginning-of-recession periods in the recent past.

I am particularly struck by the very high share of long-term unemployed and the

high number of people who are discouraged or involuntarily employed only parttime. For those who are actively seeking work, the search is likely to be long in the

current economic environment.

REFERENCES

Bernstein. Jared. 2008. ‘‘Real wage reversal persists.’’ Economic Snapshots. Washington, D.C.: Economic Policy Institute. February 20. Available at http://

www.epi.org/content.cfm/webfeaturesl snapshotsl20080220se.

Pew Center on the States. 2008. One in 100: Behind Bars in America 2008. Washington, D.C.: Pew Charitable Trusts. February. Available at http://

www.pewcenteronthestates.org/uploadedFiles/One%20in%20100.pdf.

U.S. Department of Labor, Employment and Training Administration. Unemployment Insurance Data Summary. 3rd Quarter 2007. Washington, D.C.: U.S. Department of Labor. Available at http://workforcesecurity.doleta.gov/unemploy/

content/data.asp.

PREPARED STATEMENT OF DR. CHRISTINE L. OWENS, EXECUTIVE DIRECTOR,

NATIONAL EMPLOYMENT LAW PROJECT, WASHINGTON, DC

Senator Schumer, Congresswoman Maloney and members of the Committee:

Thank you for this opportunity to testify today on the subject of unemployment in

our struggling economy, and the need for an extension of jobless benefits to help

stimulate the economy and serve the growing number of workers who are experiencing especially long durations of unemployment without finding new jobs.

My name is Christine Owens, and I am the Executive Director of the National

Employment Law Project (NELP), a non-profit research, public education and advocacy organization that specializes in economic security programs, including unemployment insurance, Trade Adjustment Assistance (TAA) and the workforce development system. Our organization has worked in the states and with Congress to protect the nation’s economic security programs against serious attacks in recent years

and to promote reforms that deliver on the nation’s promise of economic opportunity.

NELP worked with labor and community allies and supporters in Congress to secure an extension of Federal unemployment benefits during the last recession and

to win major improvements in the Federal program of benefits provided to the families left jobless by Hurricanes Katrina and Rita. In states across the nation, NELP

has been a key player in successful efforts to update states’ unemployment insurance programs, to ensure that more workers are eligible to receive benefits during

periods of joblessness. NELP also operates a special project in the Midwest, working

with state officials and others to help laid-off manufacturing workers better access

trade act benefits and related programs. Thus, we have a long-standing interest and

expertise in and commitment to policies that serve the working families hardest hit

by economic downturns in the U.S. and the fallout from globalization.

Our testimony today summarizes recent evidence of the economy’s ongoing decline, and discusses the importance of extending unemployment insurance benefits

to boost the economy overall and to provide critical support to the working families

73

1 ‘‘Study Finds Wider Impact of Mortgage Losses,’’ Wall Street Journal (March 1, 2008),

A–2. 2 Id.

3For gas prices, see http://money.cnn.com/2008/02/24/news/economy/gaspricesl0224.ap/

index.htm. 4 ‘‘Toxic Economic Mix Feared,’’ Associated Press (March 2, 2008) 5 ‘‘Recession Fears Intensify: Service-Sector Index Hits Six-Year Low; Further Rate Cuts Seen

as Dow Drops 2.9 percent,’’ Wall Street Journal (February 6, 2008).

most harshly affected by the downturn. In particular, we focus on long-term unemployment. As we point out in more detail below:

• The official unemployment rate and other measures of labor market underutilization are higher today than at the beginning of the 2001 recession.

• Unemployment claims are rising: As of the week ending February 23rd, the 4-

week moving average of claims exceeded 360,000, the highest level since Hurricane

Katrina came ashore in 2005.

• The duration of long-term unemployment—that is, unemployment exceeding 6

months—since the last recession is unprecedented. For a period of 32 consecutive

weeks beginning in November 2002, more than 20 percent of the unemployed were

jobless for at least 6 months.

• The average duration of unemployment—17.5 weeks in January 2008—is much

longer now than at the outset of the recessions that began in 2001 (12.6 weeks) and

1990 (11.9 weeks), and the number of workers jobless for at least 6 months is more

than twice as large now as in March 2001 and July 1990.

A larger share of jobless workers are exhausting their state unemployment benefits without finding work today (36 percent) than in March 2001 (32 percent) or July

1990 (28 percent).

• Waiting to extend unemployment benefits until the unemployment rate rises

more is ill-advised. As recent recessions demonstrate, the unemployment rate does

not rise dramatically until a recession is well underway or, in fact, has ended. Since

the purpose of extended benefits is to avert a recession or mitigate its consequences

for the economy and workers, pegging the extension of benefits to a jump in the unemployment rate is counterproductive.

• Unless Congress and the President act to extend unemployment benefits, an

estimated 3 million jobless workers will run out of their state benefits over the coming year, with neither jobs nor Federal benefits to rely on to support themselves and

their families.

THE DRUMBEAT OF RECESSION NEWS

The telltale signs of a national recession grow increasingly impossible to ignore

with the issuance of nearly each new economic report. What distinguishes the current economic downturn from prior recessions is the combined and continued uncertainty of the fall-out from the sub-prime mortgage collapse, the resulting credit

crunch, and the surge in energy prices, none of which show any significant signs

of improvement.

• The Sub-Prime Mortgage Crisis Escalates: Initial foreclosure notices now surpass new home sales by three to one, with 2.2 million foreclosures filed in 2007 and

an estimated 3.5 million expected by 2010. While earlier estimates put the losses

associated with the sub-prime crisis at $50 billion to $100 billion, a recent report

estimates losses will now exceed $400 billion.1

• Financial Institutions Restrict Credit: As a result of the exposure due to the

sub-prime mortgage crisis, banks and other lenders are now projected to limit their

lending and other assets by $2 trillion, thus reducing economic growth by one to

1.5 percentage points.2

• Energy Costs Keep Surging, Raising Consumer Prices: This week, oil prices

reached an all-time high of $104 a barrel, thus surpassing the prior record set during the oil crisis of the 1980’s. A gallon of gas cost $3.10 at the end of February,

up 32 percent—75 cents—from the same time last year.3 As a result of the surge

in energy prices, consumer prices increased by 4.1 percent in the past year, the largest increase in 17 years. Meanwhile, workers’ earnings are down in the past year

by 1.4 percent.4

• Service Industry Now Hard Hit, Not Just Manufacturing: The service sector

became the latest casualty of the economic downturn when the index of non-manufacturing business activity fell in recent weeks to its lowest level since October

2001.5 At the same time, manufacturing continued its devastating slide, shrinking

74

6 ‘‘U.S. Economy: Manufacturing, Construction Spending Decline,’’ Bloomberg News (March 3,

2008). 7 Reuters/University of Michigan Surveys of Consumers.

8 ‘‘U.S. Michigan Consumer Index Falls to 16 Year Low,’’ Bloomberg News (February 29, 2008). 9Zandi, ‘‘Washington Throws the Economy a Rope’’ (January 22, 2008) (available on-line at

http://www.economy.com/home/articlelds.asp?cid=102598). 10Stettner, Allegretto, ‘‘The Rising Stakes of Job Loss: Stubborn Long-Term Unemployment

Amid Falling Unemployment Rates’’ (National Employment Law Project/Economic Policy Institute, 2004). 11 ‘‘Is a Lean Economy Turning Mean: Why It’s Now Harder to Find a Job,’’ New York Times

(March 2, 2008). 12 U.S. Department of Labor Bureau of Labor Statistics, ‘‘Job Openings and Labor Turnover:

December 2007,’’ available online at http://www.bls.gov/newsw.release/pdf/jolts.pdf.

at the fastest pace in 5 years, according to the Institute for Supply Management’s

latest factory index.6

• Consumer Confidence Falls to 16–Year Low: These sobering economic forces,

combined with the declining job market described below, pushed consumer confidence down to a 16-year low in February 2008.7 Consumer spending, which represents more than two-thirds of the Gross Domestic Product (GDP), has been flat

as incomes grow more slowly because of the declining job market.8

While economists continue to debate the ultimate breadth and depth of the national economic downturn, large numbers of states are already in serious economic

distress. According to economist Mark Zandi of Moody’s Economy.com, five states

with large economies, including California, are now in recession, and these states

account for one-fourth of the nation’s Gross Domestic Project. Another 15 states are

on the verge of recession, accounting for another quarter of the nation’s GDP.9

RISING UNEMPLOYMENT COMPOUNDED BY SLOW JOB GROWTH

Working families are bracing for more hard times amid troubling signs that layoffs will rise at the same time the nation’s economy is failing to create an adequate

supply of jobs for all those who want to work.

Remarkably Slow Job Growth: For the first time in four and a half years, the

economy lost jobs in January 2008. While this represented a significant benchmark

of economic distress, the fact is that job growth has been remarkably anemic since

the last recession ended in November 2001. Indeed, after the 2001 recession, it took

46 months for employment to recover to pre-recession levels, compared with 31

months after the 1990s recession’s end. Prior to the 1990s, on average, jobs returned

to pre-recession levels after just 21 months.10 Thus, compared to prior recessions,

it is much harder for unemployed workers to find work in today’s ‘‘lean’’ economy,

while they are competing for more limited job openings.11 According to the Department of Labor’s most recent JOLTS report, job openings, new hires and separations

from employment were all down at the end of 2007, compared to December 2006.12

Higher Unemployment Rates Today Than At Outset of Last Recession: The official

unemployment rate in January 2008 was higher (at 4.9 percent) than in March 2001

(4.3 percent), when the last recession began. In January 2008, 7.6 million workers

were officially unemployed, an increase of more than half a million in the past year.

The number of ‘‘discouraged’’ workers grew to 467,000 in January 2008, the highest

number in two and half years. Meanwhile, the number of individuals working parttime for economic reasons—that is, they cannot get fulltime hours—reached its

highest level in four and half years, with 4.77 million such workers in January

2008. Taking into account all these workers, the true unemployment rate in January 2008 was 9.0 percent, up significantly from 8.3 percent just 1 year earlier and

up even more sharply from the 7.3 percent rate that prevailed at the beginning of

the 2001 recession.

Recent Surge in Unemployment Claims: Finally, unemployment claims have

reached their highest levels since Hurricane Katrina, reinforcing the point that layoffs have already taken a major toll on the nation’s workforce. For the week ending

February 23rd, unemployment claims averaged over the prior 4 weeks rose to more

than 360,000, the highest number since October 15, 2005. In addition, the total

number of workers collecting unemployment benefits increased to 2.78 million (averaged over the prior 4 weeks), which exceeds the number who were collecting unemployment benefits when the last recession began 7 years ago this month.

THE NEW REALITIES OF LONG-TERM UNEMPLOYMENT

As the above data reflect, the overall picture of jobs and joblessness in today’s

economy is bleak for America’s working families, and points to the need for extended

unemployment benefits to boost economic growth. Further underscoring the need for

75

a Federal extension of jobless benefits, a record percentage of unemployed workers

today remain jobless after actively looking for work for more than 6 months. Hailing

from all walks of life, these jobless workers are struggling on limited income in a

punishing economy to maintain their housing in the midst of the worst foreclosure

crisis since the Great Depression and to pay skyrocketing costs for basic necessities,

like food and gas.

Long-term Joblessness: No Comparison to Prior Recessions: High rates of longterm unemployment have persisted longer since the recession that ended in November 2001 than was the case with respect to the two preceding recessions, which

ended in March 1991 and November 1982, respectively. In November 2002, 1 year

after the most recent recession’s end, the share of jobless workers unemployed for

6 months or longer (the ‘‘rate’’ of long-term unemployment) surpassed 20 percent,

and it remained at or above that level for a record 32-month stretch. In contrast,

the rate of long-term unemployment after the early 1990s recession exceeded 20 percent for a total of only 23 months, with the longest continuous stretch at the 20 percent or higher rate lasting 11 months. And the long-term unemployment rate exceeded 20 percent after the early 1980s recession for only 18 months. Moreover,

while the rate of long-term joblessness returned to 10–to–11 percent of the unemployed after the past two recessions, it has remained above 16 percent since the recession of 2001 and is now again on the rise.

Simply put: The problem of long-term joblessness is far greater today than at the

beginning of our most recent past recessions. Additional measures underscore the

greater severity of the problem:

• In March 2001, when the last recession began, the average worker was unemployed for 12.6 weeks before finding new work. And at the beginning of the preceding recession in July 1990, the average duration of unemployment was 11.9

weeks. In sharp contrast, the average duration of unemployment in January 2008

was 17.5 weeks.

I• n January 2008, almost 1.4 million workers remained unemployed after actively looking for work for more than 6 months, up from 1.1 million just 1 year earlier, in January 2007. The January 2008 figure is more than twice the number who

were long-term unemployed in both March 2001 (696,000) and in July 1990

(688,000).

• In January 2008, the long-term unemployed accounted for 18.3 percent of all

jobless workers, compared to 11.1 percent in March 2001. In July 1990, 11.9 percent

of the unemployed were long-term jobless, and the proportion did not reach today’s

rate until 21 months later (in March 1992).

The Diverse Profile of the Long-Term Jobless: The ranks of unemployed workers

who are looking for jobs for longer periods of time are not limited to any particular

demographic group, although certain groups of workers are over-represented in this

76

category relative to their representation among the unemployed generally. As set

out in Table 1 below, men account for 57 percent of the long-term unemployed, compared to 54 percent of all unemployed. While workers 45 and older make up 27 percent of all the nation’s unemployed, they represent 37 percent of the long-term jobless. Nearly two-thirds of the long-term unemployed are white, but African-Americans are over-represented in the category (28 percent) compared to their share of

the unemployed generally (21 percent).

Perhaps not surprisingly given the continued loss of well-paying manufacturing

jobs to trade and globalization, manufacturing workers are also somewhat over-represented among the long-term unemployed relative to their share of all unemployed

workers (12 percent of the long-term unemployed compared with 10 percent of all

the unemployed). However, workers employed in other sectors are significantly represented among the long-term unemployed as well, especially including those who

worked in professional and business services (12 percent), wholesale and retail trade

(15 percent), and educational and health services (12 percent).

THE BENEFIT ECONOMIC IMPACT OF JOBLESS BENEFITS

Unemployment benefits provide one of the most effective means available to Federal policymakers to immediately stimulate the economy and help prevent or forestall a more serious recession. In fact, a major study of past recessions found that

each dollar of unemployment insurance benefits boosts the nation’s GDP by $2.15,

and that at their peak, UI benefits saved an average of 130,000 jobs on an annual

77

13 Chimerine, et al. ‘‘Unemployment Insurance as an Economic Stabilizer: Evidence of Effectiveness Over Three Decades,’’ U.S. Department of Labor, Unemployment Insurance Occasional

Paper 99–8 (1999). 14Zandi, ‘‘Washington Throws the Economy a Rope’’ (January 22, 2008). 15 According to Mr. Zandi, ‘‘The slump in consumer confidence in late 1991, after the 1990–

91 recession, may well have been due in part to the first Bush administration’s initial opposition

to extending UI benefits for hundreds of thousands of workers. The administration ultimately

acceded and benefits were extended, but only after confidence had waned. The fledging recovery

sputtered and the political damage extended through the 1992 Presidential election.’’ Id. 16State of Washington, Employment Security Department, Claimant Expenditure Survey,

2005 (January 2006) 17Gruber, ‘‘Unemployment Insurance, Consumption Smoothing, and Private Insurance: Evidence from the PSID and CEX,’’ Advisory Council on Unemployment Compensation Background

Papers, Vol. I (1995), at page 20. 18Stettner, Emsellem, ‘‘Unemployment Insurance is Vital to Workers, Employers and the

Struggling Economy’’ (National Employment Law Project: December 5, 2002). Boushey, Wenger,

‘‘Finding the Better Fit: Receiving Unemployment Insurance Increases Likelihood of Re-Employment with Health Insurance’’ (Economic Policy Institute: April 14, 2005). 19The TEUC the program was limited to states with unemployment rates above 6.5 percent,

plus the state had to have experienced a significant increase of unemployment in either of the

past 2 years. As a result, while 14 states qualified for the full 26 weeks of TEUC benefits, they

did so only for a few months before they ‘‘triggered off’ the program because their unemployment

Continued

basis.13 Unemployment benefits are targeted directly to those communities hardest

hit by downturns; they flow with virtually no delay to affected workers; and because

these workers, in turn, must spend their benefits to support themselves and their

families, the money is quickly recycled through the economy.

As economist Mark Zandi notes, unemployment benefits sustain consumer confidence and consumer spending, which is the backbone of today’s economy. ‘‘The benefit of extending unemployment insurance goes beyond simply providing financial

aid for the jobless, to more broadly shoring up household confidence. Nothing is

more psychologically debilitating, even to those still employed, than watching unemployed friends and relatives lose benefits.’’ 14 Mr. Zandi posits that part of the serious slump in consumer confidence following the 1991 recession was due to the initial refusal of the first President Bush to immediately extend jobless benefits.15

In addition to bolstering consumer confidence and sustaining consumer spending,

extending unemployment benefits would have a potentially salutary impact on the

home foreclosure crisis widely viewed as the trigger for today’s economic downturn.

Families of jobless workers spend more of their unemployment benefits to cover the

costs of their mortgages and rent than for any other household item. According to

a state survey, 41 percent of expenditures paid for with unemployment benefits

were applied to housing costs. After housing, unemployment benefits were spent primarily on transportation (14 percent), food (13 percent), loans (12 percent) and

health care (6 percent).16 Another national study found that unemployment benefits

reduced the chances that a worker will be forced to sell the family home by almost

one-half.17 In addition, unemployment benefits sustain families during hard times

by substantially reducing the likelihood that they will fall into poverty and helping

them make the challenging transition to quality jobs with health care and other

benefits.18

CURRENT FEDERAL EXTENDED BENEFITS POLICY FAILS THE UNEMPLOYED

With an economy that has produced record rates of long-term unemployment, the

need for an effective and reliable permanent program of extended unemployment

benefits is more crucial than ever. What we have, instead, is a Federal system of

extended unemployment benefits that is far from reliable or effective, thus creating

the necessity for a temporary extension of benefits.

The permanent Federal program of ‘‘Extended Benefits’’ (EB) is so outdated in

how it measures unemployment that no state now qualifies for the program, not

even Michigan, which has had an unemployment rate exceeding 7 percent since August 2006. During the last recession, only six states qualified for EB, and during

the recessions of the 1990s, only 10 states qualified for the program. In addition to

the flawed ‘‘trigger’’ formula, the EB program requires the states to pay for 50 percent of the benefits, thus putting serious pressure on state unemployment trust

funds at the very moment the demand is greatest to pay state benefits.

Because the EB program is so flawed, Congress has enacted a temporary extension of Federal jobless benefits during the past five recessions. In 2002, Congress

extended jobless benefits by 13 weeks for all states, while providing an extra 13

weeks of Federal support to certain states with unemployment rates that exceeded

6.5 percent.19 The extension that recently failed by one vote in the Senate (EcoVerDate 11-MAY-2000 09:23 Nov 21, 2008 Jkt 042514 PO 00000 Frm 00081 Fmt 6601 Sfmt 6621 C:\DOCS\42514.TXT DianeA PsN: DianeA
78

rate did not continue to rise as required by the 2002 Federal law. National Employment Law

Project, ‘‘Nation’s Highest Unemployment States Face Major Cuts in Unemployment Benefits

Due to Flawed Extension Program,’’ (November 4, 2003). 20The January to June 2008 estimate in Table 3 takes into account the number of people who

were paid unemployment benefits from July to December 2007, multiplied by the latest reported

state ‘‘exhaustion’’ rate (3rd Quarter 2007). The estimates for July to December 2008 assume

a 26 percent increase in unemployment insurance recipients—the same rate of increase experienced during the 2001 recession—multiplied by the latest reported state ‘‘exhaustion’’ rate (3rd

Quarter 2007).

nomic Stimulus Act of 2008) was nearly identical to the March 2002 TEUC program.

In contrast, prior Federal extensions (including the 1991 and 1975 extension programs) were more generous, providing 20 to 26 weeks of extended benefits for all

states, with extra weeks of benefits often available to states with especially high levels of joblessness.

Responding more effectively to the new realities of long-term unemployment, legislation is pending in both the Senate and the House to extend jobless benefits beyond the limited 13 weeks provided during the last recession. Senator Edward Kennedy recently introduced the Emergency Unemployment Compensation Extension

Act of 2008 (S. 2544), which provides 20 weeks of extended benefits to workers in

all states, plus an extra 13 weeks for states with unemployment levels exceeding

6.0 percent (averaged over 3 months). In addition, because the unemployment benefits provided by most states are so limited (averaging only $285 per week), the bill

provides an extra $50 a week in Federal extended benefits to help families cope with

the rising costs of fuel, food and other basic necessities.

In the House of Representatives, Congressman James McDermott has introduced

a bill to extend Federal jobless benefits (H.R. 4934), providing 26 weeks of extended

unemployment benefits for all states, as well as a $50 supplement in weekly unemployment benefits. In contrast to the Senate bill, the McDermott measure does not

provide extra weeks of benefits for high unemployment states. Both the House and

Senate bills significantly improve upon the TEUC program enacted in 2002 by accounting for the increase in long-term unemployment and the rising costs of fuel

and other basic necessities.

EXTENDING JOBLESS BENEFITS NOW WILL HELP MORE THAN THREE MILLION WORKERS

WHO WILL EXHAUST THEIR STATE BENEFITS THIS YEAR, WITHOUT FINDING NEW JOBS

If Congress and the White House do not promptly extend jobless benefits, an estimated three million workers will run out of their state unemployment benefits this

year and will have neither new jobs nor extended benefits to help support them and

their families. (Table 2). As it becomes more difficult to find work during the year,

the numbers are expected to grow significantly. During the 6 months from January

to June 2008, a projected 1.3 million workers will exhaust their state unemployment

benefits, and that number will likely increase to as many as 1.7 million workers

from July to December 2008.20

Corresponding to the rise in long-term unemployment, today’s jobless workers are

more likely to exhaust their state unemployment benefits than in immediate past

recessions. Based on an analysis of the latest available data (3rd Quarter 2007), 36

percent of all jobless workers collecting state unemployment compensation exhaust

their 26 weeks of benefits without finding jobs. That compares with 32 percent in

March 2001, when the last recession began, and 28 percent in July 1990, when the

preceding recession began. As indicated earlier, more people are now collecting unemployment benefits (2.8 million), the highest level since Hurricane Katrina, and

they, too, will be exhausting their benefits in the coming months.

The problem is especially severe in some of the nation’s most populous states hit

hard by the foreclosure crisis, which has had the cascading effect of generating layoffs in construction and financial services, and in public sector jobs affected by the

fall-off in state revenues. In California, for example, the unemployment rate has increased nearly a full percentage point in the past year alone; it now stands at 5.9

percent, with more than a million unemployed workers. During this period, 433,000

workers exhausted their state unemployment benefits (up about 30,000 from the

past year), and another 2.4 million workers applied for new benefits (up more than

200,000 in the past year). In Florida, also hit hard by the housing crisis, the unemployment rate has increased almost a percentage point in the past year (to 4.5 percent in December 2008), 136,000 workers have exhausted their state unemployment

benefits (up 35,000), and more than 645,000 workers applied for new benefits (up

150,000 in the past year).

79

21Woodbury, Rubin, ‘‘The Duration of Benefits’’ (in Unemployment Insurance in the United

States: Analysis of Policy Issues: Upjohn Institute for Employment Research, 1997). 22 Card, Chetty, Weber, ‘‘The Spike at Benefit Exhaustion: Leaving the Unemployment System

or Starting a New Job?’’ (National Bureau of Economic Research: February 2007), at page 5

(‘‘With respect to behavior at point of exhaustion, some (but not all) of the studies using survey

data to measure job starts find evidence of a spike in the re-employment hazard, while most

(but not all) of the studies using administrative data on job starts finds a relatively smooth hazard. Overall, the literature suggests that spikes in the exit rate around benefit exhaustion are

generally smaller when duration is measured as time to next job rather than time unemployed.’’) 23 Needles, Nicholson, ‘‘Any Analysis of Unemployment Insurance Durations Since the 1990–

1992 Recession (Mathematica Policy Research, Inc., March 1999), at pages 6–7 (‘‘The aggregate

analysis concludes that changes in weekly benefit amounts or in average potential duration at

the state level cannot explain the increase in average UI duration relative to historical patterns.’’) 24 Unemployment Insurance in the United States: The First Half Century (1993), at page 47

(quoting the U.S. Department of Labor, Committee on Unemployment Insurance Objectives,

1969) 25See footnote 18. 26Peter D. Hart Research Associates, ‘‘Unemployed in America’’ (poll commissioned by the National Employment Law Project, April 2003). 27Testimony of Chairman Greenspan, quoted in ‘‘Senate Proposal to Add Unemployment Insurance Benefits Improves Effectiveness of Stimulus Bill (Center on Budget and Policy Priorities, January 231, 2008).

RESPONDING TO THE ARGUMENT THAT UNEMPLOYMENT BENEFITS DISCOURAGE THE

JOBLESS FROM LOOKING FOR WORK

It is important to respond to the questionable argument made by some that jobless benefits should not be extended because they discourage the unemployed from

looking for work. The reality is that the effect of unemployment benefits on the time

spent unemployed is generally overstated, especially during recessions when the

competition for jobs is most intense; and critics also ignore how jobless benefits contribute to improving the quality of jobs the unemployed eventually secure.

First, with regard to the research, the extent of the impact of unemployment benefits on the duration of unemployment is a subject of significant debate. While some

researchers have found that a 13-week extension of benefits is associated with a 2-

week increase in the duration of unemployment,21 others have recently concluded

that the outcome varies significantly depending on the study design.22 Still other

studies have concluded that increases in the length of time workers are unemployed

while on benefits is more a function of factors like an increase in manufacturing layoffs, not more generous unemployment benefits.23

Second, and perhaps most important, the argument conspicuously fails to account

for the favorable impact on the quality of jobs that unemployed workers are able

to secure with the help of their unemployment benefits. As described by leading UI

authorities assembled by the U.S. Department of Labor, a primary objective of the

program is to allow workers ‘‘the time needed to locate or regain employment that

takes full advantage of [their] skills and experience.’’ 24 Research conclusively shows

that those collecting unemployment benefits receive more in pay and better benefits

in replacement jobs, including health care, which is of special significance in today’s

economy.25

Finally, consider the fact that unemployment benefits only average $285 a week.

Given these limited benefits, it is simply unfair and unreasonable to conclude that

a typical unemployed worker, faced with seeking employment during a recession

while also having to pay for the rising costs of housing, food, gas and home heating,

would find the benefits themselves sufficient to reduce the aggressiveness of the job

search. Indeed, a national poll of unemployed workers conducted during the last recession found that they applied for an average of 29 jobs a month, which is certainly

an active and intensive effort to find work.26

In fact, during periods of recession, it is especially unconvincing to argue that

extra benefits will negatively influence the work search of large numbers of workers.

As former Federal Reserve Chairman Alan Greenspan argued in testimony before

this Committee in 2002, ‘‘[W]hen you get into a period where jobs are failing, then

the arguments that people make about creating incentives not to work are no longer

valid and hence, I have always urged that in periods like this, the economic restraints on the unemployment insurance system almost surely ought to be eased to

recognize the fact that people are unemployed because they couldn’t be a job, not

because they don’t feel like working.’’27

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28Official Urges Senate to Pass Stimulus Plan, Bloomberg News (February 6, 2008). 29The Rising Stakes of Job Loss, at page 3. 30 Jobs Data Pass Threshold Where Recessions Dwell, New York Times (January 19, 2008).

THE OFFICIAL UNEMPLOYMENT RATE SHOULD NOT BE DECISIVE WITH RESPECT TO EXTENDING BENEFITS, AND WAITING FOR FURTHER INCREASES IN THE UNEMPLOYMENT

RATE WILL HELP NEITHER THE ECONOMY NOR THE LONG-TERM UNEMPLOYED

Treasury Secretary Henry Paulson, the administration’s chief economic spokesman, parted ways with leading national economists when he opposed an extension

of jobless benefits to help stimulate the economy. According to Mr. Paulson, ‘‘with

unemployment at 4.9 percent, to extend unemployment benefits would be unprecedented.’’28 Subsequent statements by the President and others in his administration

echo Mr. Paulson’s views.

The administration’s reliance on the national unemployment rate to refuse to extend jobless benefits is misplaced. First, this rationale fails to take into account the

stark new realities of slow job growth and greater long-term unemployment, neither

of which is adequately captured by the overall unemployment rate—and both of

which are powerful reasons to extend unemployment benefits.

Second, the administration’s argument ignores the new reality of the unemployment rate illustrated by the past two recessions, where the unemployment rate has

lagged farther and farther behind in relation to the economic recovery. Thus, the

unemployment rate does not increase substantially until the economy is already

well into a recession. Excluding the last two cycles, since 1948 it took, on average,

1.6 months into an economic recovery for unemployment rates to peak.29 In contrast, following the 1990–91 recession, it took 15 months for unemployment to peak.

The lag was even longer for the 2001 recession, when it took the unemployment rate

19 months before it peaked. And the role of extended benefits is to stimulate the

economy, thus forestalling or helping to minimize a recession. Waiting, as the administration proposes, to extend unemployment benefits until after unemployment

has risen sharply—signally a recession is well underway or has ended—is akin to

closing the door after the horse has left the proverbial barn.

For example, consider the experience of the last several recessions, when Congress and the President did not extend benefits until 12 to 16 months after the recessions began, thus failing to take advantage at the front end of the opportunity

to avert or minimize the downturn. Indeed, in the case of the last extension, Congress waited until March 2002, 4 months after the recession ended to enact extended benefits. By that time, the unemployment rate had reached 5.7 percent, the

number of workers exhausting unemployment benefits had increased from 192,000

(at the beginning of the recession) to 372,000 a month, and a total of 3.5 million

long-term jobless workers had been left without any additional jobless benefits to

support their families. When the recession began, the unemployment rate was 4.3

percent. January’s 4.9 percent unemployment rate is thus well above the rate when

the last recession began, and a larger number of workers (200,000 to 260,000 workers) are already exhausting their benefits every month.

The Administration’s rationale also abandons the 20 states that economist Mark

Zandi says are either already experiencing a recession or on the verge of doing so.

These states’ economies are the casualties of the sub-prime mortgage crisis, the continued loss of manufacturing jobs, and other forces beyond their control. Some of the

states have especially high unemployment rates, but others do not, again reflecting

the inadequacy of unemployment rates as measures of economic distress and the inappropriateness of relying upon them to determine when to implement a program

of extended benefits after a downturn has begun.

Most importantly, what is more critical than the level of unemployment today is

that the unemployment level has increased. The unemployment rate is a function

of many factors, including labor force participation and the structure of the economy. However, whenever the unemployment level increases substantially, it is clearly going to be far harder for workers to find work before their regular unemployment benefits run out because of increasing competition for jobs. And the increase

in unemployment that has already occurred foreshadows worse times to come. The

level of unemployment increased by 13 percent from December 2006 to December

2007, and there has never been an occasion in the last 50 years when such a large

annual jump did not precede a longer recession.30 There is ample evidence that

searching for work today is hard and will get worse—providing clear support for an

extension of benefits.

81

31U.S. Government Accountability Office, Unemployment Insurance: Receipt of Benefits Has

Declined, With Continued Disparities for Low-Wage and Part-Time Workers (September 18,

2007). 32 Advisory Council on Unemployment Compensation, Collected Findings and Recommendations: 1994–1996 (1996). 33 National Employment Law Project, ‘‘The New Congress Proposes $7 Billion in Incentive

Payments for the State to Modernize the Unemployment Insurance Program,’’ (July 25, 2007).

MODERNIZE THE UNEMPLOYMENT INSURANCE PROGRAM

In addition to extending jobless benefits, Congress should address the serious

gaps in the unemployment insurance program that deny benefits to thousands of

hard-working families, especially low-wage and part-time workers.

Today, only 36 percent of unemployed workers collect unemployment benefits, due

mostly to outdated state eligibility rules. According to a recent study by the U.S.

Government Accountability Office, low-wage workers are now twice as likely to become unemployed as higher wage earners, but they are one-third as likely to receive

unemployment benefits.31 More than a decade ago, a bi-partisan Congressionally

chartered commission recommended state and Federal reforms to address these concerns.32

Incorporating many of the Federal commission’s recommendations and the model

state reforms already adopted by half the states, the House of Representatives recently passed legislation providing incentive grants for states to modernize their unemployment insurance programs (H.R. 3920, Title IV). A similar measure, the Unemployment Insurance Modernization Act (S. 1981), has strong bi-partisan support

in the Senate. If enacted into law and embraced by the states, an estimated 500,000

low-wage and part-time workers will qualify for unemployment benefits under the

modernized state programs.33 The legislation is paid for from the Federal unemployment trust funds by extending an unemployment surtax that has been in place for

over 30 years. If swiftly passed, the legislation will go a long way to modernize the

unemployment program and help stabilize the economy.

CONCLUSION

The nation’s economy is in downturn and may well already be in recession. Job

growth has slowed, and unemployment, while hovering still at around 5 percent, is

higher now than at the beginning of the two most recent past recessions. In crucial

respects, the labor market has not rebounded from the last recession. Job growth

overall has been lackluster, at the same time long-term unemployment has been tenacious. Enacting a program of extended unemployment insurance benefits now

would quickly move resources to working families that need them and will spend

them, helping to stimulate demand, boost consumer confidence, and avert a more

serious downturn. Failing to act now means that over the next year, three million

jobless workers will run out of state unemployment benefits without finding new

jobs or having a program of extended Federal benefits to fall back on, to support

themselves, their families and the nation’s economy.

Table 2: Estimated Number of Workers Who Will Exhaust State Jobless Benefits in 2008

State

Estimated number of

workers who will exhaust State benefits

(January to June

2008)

Estimated number of

workers who will exhaust State benefits

(July to December

2008)

Total

Alabama ................................................................................... 12,510 17,533 30,043

Alaska ...................................................................................... 6,913 9,775 16,688

Arizona ..................................................................................... 18,846 20,713 39,559

Arkansas .................................................................................. 16,505 17,918 34,423

California ................................................................................. 218,496 285,756 504,252

Colorado ................................................................................... 12,996 19,165 32,161

Connecticut .............................................................................. 17,250 27, 301 44,551

Delaware .................................................................................. 3,776 4,927 8,703

DC ............................................................................................ 4,769 5,357 10,126

Florida ...................................................................................... 86,092 85,941 172,033

Georgia ..................................................................................... 39,826 45,644 85,470

Hawaii ...................................................................................... 2,654 3,122 5,776

Idaho ........................................................................................ 5,151 7,561 12,712

Illinois ...................................................................................... 57,093 84,209 141,302

Indiana ..................................................................................... 33,598 51,380 84,978

82

Table 2: Estimated Number of Workers Who Will Exhaust State Jobless Benefits in 2008—

Continued

State

Estimated number of

workers who will exhaust State benefits

(January to June

2008)

Estimated number of

workers who will exhaust State benefits

(July to December

2008)

Total

Iowa .......................................................................................... 8,736 15,518 24,254

Kansas ..................................................................................... 7,754 12,324 20,078

Kentucky ................................................................................... 11,458 15,603 27,061

Louisiana .................................................................................. 11,140 13,171 24,311

Maine ....................................................................................... 4,019 7,565 11,584

Maryland .................................................................................. 15,848 20,972 36,820

Massachusetts ......................................................................... 34,275 52,821 87,096

DMichigan ................................................................................ 72,136 95,207 167,343

Minnesota ................................................................................. 19,237 34,468 53,705

Mississippi ............................................................................... 7,819 10,592 18,411

Missouri .................................................................................... 17,727 29,927 47,654

Montana ................................................................................... 2,996 4,653 7,649

Nebraska .................................................................................. 6,009 10,046 16,055

Nevada ..................................................................................... 15,645 16,188 31,833

New Hampshire ........................................................................ 1,848 2,982 4,830

New Jersey ................................................................................ 66,415 89,617 156,032

New Mexico .............................................................................. 6,142 8,274 14,416

New York .................................................................................. 84,866 107,493 192,359

North Carolina .......................................................................... 48,245 64,853 113,098

North Dakota ............................................................................ 1,562 2,945 4,507

Ohio .......................................................................................... 35,320 54,049 89,369

Oklahoma ................................................................................. 7,515 10,479 17,994

Oregon ...................................................................................... 20,695 26,094 46,789

Pennsylvania ............................................................................ 58,976 94,434 153,410

Rhode Island ............................................................................ 7,038 10,748 17,786

South Carolina ......................................................................... 21,960 26,591 48,551

South Dakota ........................................................................... 304 672 976

Tennessee ................................................................................. 22,037 33,386 55,423

Texas ........................................................................................ 49,104 68,018 117,122

Utah ......................................................................................... 4,029 4,882 8,911

Vermont .................................................................................... 1,763 3,000 4,763

Virginia ..................................................................................... 17,076 25,242 42,318

Washington .............................................................................. 18,253 21,648 39,901

West Virginia ............................................................................ 4,179 7,274 11,453

Wisconsin ................................................................................. 32,401 47,8D0 80,201

Wyoming ................................................................................... 1,147 1,932 3,079

Total ................................................................................ 1,282,149 1,737,770 3,019,919

Source: Estimates prepared by the National Employment Law Project (NELP) based on U S. Department of Labor Employment and Training Administration data.

PREPARED STATEMENT OF DR. LOWELL GALLAWAY, DISTINGUISHED PROFESSOR OF

ECONOMICS, OHIO UNIVERSITY AND RICHARD K. VEDDER, DISTINGUISHED PROFESSOR OF ECONOMICS, OHIO UNIVERSITY

Our message today is quite straightforward, namely, that it would be very unwise

to return to an activist short-run contra-cyclical macroeconomic policy. A more detailed argument for this position is provided in a set of extended remarks that we

ask to have incorporated in the hearing record.

For now, we will provide a summary description of the behavior of the American

unemployment rate beginning with 1948. For this purpose, we call your attention

to the graphic appended to this statement. It describes the 10-year average unemployment rate for six decades, beginning with 1948–1957 and concluding with 1998–

2007. In the initial decade, unemployment averaged 4.3 percent, while the most recent period shows an average unemployment rate of 4.9 percent. Thus, there is only

a modest difference between the early and late years.

Far more interesting, though, is what happened in the intervening decades. Over

the period 1958–1967, the average unemployment rate increased to 5.3 percent. In

the years starting with 1968 and concluding with 1977, it increased to an average

83

of 5.7 percent. Next, in the interval 1978–1987, it further increased to an average

of 7.4 percent.

These three decades span a period in which the basic philosophy of policymakers

was an activist one. Perhaps the quintessential statement of the attitudes of the

time was provided by John Kenneth Galbraith, in 1982 testimony before this committee, when he remarked as follows:

‘‘Persistent in the belief of the present administration is the notion that economic

recovery and improving unemployment are an autonomous tendency of the system

. . . (T)here is . . . no such autonomous tendency. Recovery is not the work of

kindly gods with a special commitment to the free enterprise system. It is, alas, the

affirmative accomplishment of man—and woman.’’

In the years that followed, disenchantment with the activist approach became

widespread and, in the years 1988–1997, the average unemployment rate fell to 6.0

percent, presaging a further decline to the most recent decade’s 4.9 percent.

Obviously, we are implying that the recent declines in the 10-year average of unemployment rates are a product of a turning away from an activist policy approach.

Is this, perhaps, too simplistic? We think not. Our view is based on the extended

remarks that we have asked to be included in the hearing record. Specifically, we

refer you to a technical appendix to those remarks which consists of extracts from

an article published in a refereed academic journal. This article concludes, among

other things, that:

(1) Cycles in the unemployment rate are the result of shocks in the labor market

that produce discoordination;

(2) These shocks are random, in a statistical sense, and, therefore, cannot be successfully forecast;

(3) About forty percent of the effects of the random shocks are eliminated by an

endogenous correction mechanism;

(4) Assuming that economic policymakers recognized the shocks immediately and

were able to exactly compensate for them, the result would be a less stable labor

market and higher average unemployment rates;

(5) Therefore, short-term macroeconomic contra-cyclical policy is counter-productive.

Based on these premises, we find it disturbing that there is much talk of a return

to a philosophy that deliberately accepts higher inflation in an attempt to stimulate

the economy. This is the language of the late 1950’s and the 1960’s, which ultimately led to eleven consecutive years of increase in the 10-year moving average

of the unemployment rate. In the last 100 years, this is surpassed only by the thirteen year run-up of the average unemployment rate that embraces the Great Depression of the 1930’s.

Contrast that with what happened when we turned away from emphasizing shortrun contra-cyclical policy in the early 1980s. We have just now (in 2007) concluded

the twenty-third consecutive year of decline in the 10-year moving average of the

unemployment rate. That is almost twice the length of the second-longest period of

decline, twelve years, which accompanied the recovery from the Great Depression

and World War II.

To conclude our testimony, we offer two bits of advice to the formulators of national policy. First, do not repeat the errors of the past. Second, do not destroy the

good that has emerged in the last quarter century in a futile pursuit of an unattainable perfection. We thank you.

LOWELL GALLAWAY

RICHARD VEDDER

Ohio University Athens, Ohio

84

85

A BRIEF HISTORY OF UNEMPLOYMENT IN POST-WORLD WAR II AMERICA

Lowell Gallaway and Richard Vedder

As World War II moved toward its conclusion, there emerged a widespread consensus that substantial unemployment would be the order of the day after the war.

One review of various forecasts confirms that many economists believed that a severe recession, or even depression, was on the horizon.1 That view also was held

by most Federal officials. As one of the nation’s foremost experts on business cycles

put it, ‘‘In the summer of 1945 the belief was fairly widely held in Washington that

unemployment would be a serious problem in the winter of 1945–1946 and a strong

deflationary trend was predicted.’’ 2

In part. The forecast of a depression could be traced to the secular stagnation argument propounded by Alvin Hansen in his 1938 Presidential Address before the

American Economic Association.3 In that speech, he argued that the investment

boom which had stimulated American economic growth had stalled after the closing

of the frontier and with the advent of a slower rate of population growth.

It also reflected a more short-term concern associated with the prospect of a decline in Federal Government expenditures. The thought of a rapid reduction in government military spending was a nightmare for some, including Hansen, who wrote,

in 1943, ‘‘when the war ends, the government cannot just disband the army, close

down munitions factrories, stop building ships, and remove all economic controls.’’4

Politicians took the dire predictions of economists seriously. President Truman,

speaking to the Congress a few days after the Japanese surrender, said of re-conversion: ‘‘Obviously, during the process there will be a great deal of inevitable unemployment.’’ 5 Business groups agreed with the President. Just a few days earlier, the

prestigious Committee for Economic Development, representing twenty-nine hundred business practitioners and headed by prominent industrialist Paul G. Hoffman,

Chairman of the Studebaker corporation, called for Federal aid to assist the newly

created jobless to move to areas where jobs were created.

Truman’s choice of the adjective inevitable was an unfortunate one. In the first

nine quarters following the formal end of the war, the unemployment rate never exceeded 4.1 percent and averaged 3.9 percent. This burst of prosperity was explained,

after the fact, by some of the very same economists who had forecast hard times,

as being the result of pent-up consumer demand. However, the empirical evidence

does not support this thesis.6 Rather, government decisions to do exactly what Hansen proclaimed it could not do freed markets to establish a new set of relative prices

that largely were devoid of the distortions that had characterized the Great Depression.

There was still a nagging concern about unemployment. Many people anxiously

were waiting for a severe economic downturn that would signal a return to Great

Depression levels of activity. It never came. To be sure, there were a series of brief

recessions in 1949, 1954, 1958, and 1961. Yet the average unemployment rate for

the years 1948–1957 was only 4.3 percent.

By now, though, that old gadfly, Alvin Hansen, was back at work, ignoring his

having been consistently wrong over the previous twenty years. He was bothered

by those nagging recessionary episodes and he was quite willing to provide a new

round of advice. While admitting that things had not gone too badly thus far in the

post-World War II era, he admonished policymakers that America could do much

better if it would put aside its fears of general price inflation. All we would need

to do to increase the level of economic activity and reduce unemployment would be

to introduce an additional amount of inflationary pressure in the economy.7 Hansen’s policy prescription acquired greater validity in the wake of Paul Samuelson’s

and Robert Solow’s notorious Phillips Curve paper presented in 1959.8 It argued

that there was a stable tradeoff between inflation and the unemployment rate.

The notion of a stable Phillips Curve suggested the existence of a fixed menu of

choices from which policymakers could choose. The fly in the ointment, however,

was that Phillips Curve stability required the presence of a permanent money illusion on the part of workers. This proved not to be the case and, as we moved

through the 1960’s and into the 1970’s, higher and higher rates of price inflation

were required to hold the unemployment rate in check. By the late 1970’s, the Phillips Curve concept was so discredited that, in the 1976 amendments to the Employment Act of 1946, language was inserted that one of the co-authors of the legislation, Congressman Augustus Hawkins, would later, somewhat fatuously, assert

made the practice of tradeoff economics illegal. Meanwhile. The 10-year moving average of the unemployment rate, after bottoming out at 4.6 percent in 1973, began

what would be an eleven year steady ascent to almost 7.7 percent in 1984, despite

double digit rates of price inflation circa 1980. See Chart A for details.

86

To provide some insight into the state of economic thinking at the end of the decade of the 1970s we offer some remarks from the preface to the proceedings of a

conference held in March 1980. The conference was held by that venerable body, the

American Assembly, with the sponsorship of the Annenberg School of Communication’s Center for the Study of the American Experience, under the title, Economic

Issues and the President: 1980 and Beyond. The preface contains the following assessment: 9

‘‘When the United States entered the decade of the seventies, political leaders were

divided in their views about the most effective measures to pursue in the management of the American economy . . . but they all had one thing in common: the

conviction . . . that the American economy was manageable.

‘‘As we enter the decade of the eighties, more and more Americans are beginning

to question whether our economy is manageable. Some observers have suggested

that our economy is ‘‘over the hill’’ and that we must either undertake fundamental

changes to our whole system or else face the prospect of becoming a second-rate nation, watching others take over the primacy of world economic leadership.’’

Two sets of comments from this time illustrate the state of American thinking.

First, there is President Jimmy Carter’s remarks in the 1980 Economic Report of

the President10

‘‘I have therefore been forced to conclude that reaching the goals of a 4 percent unemployment rate and 3 percent inflation rate by 1983 is no longer practicable.

‘‘Reducing inflation from the 10 percent expected in 1980 to 3 percent in 1983 would

be an . . . unrealistic expectation. Recent experience indicates that the momentum of inflation built up over the past 15 years is extremely strong. A practical goal

for reducing inflation should take this into account.

‘‘Because of these economic realities, I have used the authority provided to me in

the Humphrey-Hawkins Act to extend the timetable for achieving a 4 percent unemployment rate and a 3 percent inflation. The target year for achieving 4 percent unemployment is 1985, a 2-year deferment. The target year for lowering inflation to

3 percent has been postponed until 3 years after that (1988).’’

Carter’s stance suggests an attitude that perceives that there is something intractable about the inflation rate. This is consistent with the thinking of certain major

economists. In particular, Otto Eckstein, an eminence in the area of economic forecasting and the founder of Data Resources Incorporated, formalized the notion of inflation being a structural problem by formulating the notion of core inflation.11 He

estimated core inflation to be quite high and thought that to achieve an unemployment rate of 5 percent would require an inflation rate of 10 percent. He despaired

of economic management’s being able to deal with the problem of inflation in any

satisfactory way, remarking that:

‘‘In summary, the fiscal and monetary policies which the government employs to

manage aggregate-demand must create a constructive environment in which inflation can be improved, but they cannot, ‘‘by themselves,’’ solve the problem. Aggressive demand management, aiming at unemployment rates averaging 6 percent or

less every year, makes it impossible to have any other policy succeed The inflation

will simply become worse and worse—until the public despairs and forces politicians

to adopt price controls.’’

History was unkind to Otto Eckstein. His words were written for the American

Assembly conference in March, 1980. Roughly a year-and-a-half later, in the fourth

quarter of 1981, the rate of price inflation suddenly slowed, falling to levels that,

according to his estimates of core inflation, were not attainable in the American

economy. The trend continued through the first quarter of 1982. In these 6 months,

the average rate of price inflation fell from the 1 percent a month that had been

common since the beginning of 1979 to one-quarter of 1 percent per month. There

was a brief resurgence of inflation in late Spring (may and June), but, even so, from

mid-1981 through mid-1982, the rate of price inflation (measured by the consumer

price index) declined to 6.2 percent, some 40 percent less than the 10.3 percent increase between mid-1980 and mid–1981. After the brief surge in inflation in the

spring, the lower level of price inflation reasserted itself. In the last 6 months of

1982, the monthly average for the rate of price inflation returned to a quarter of

1 percent per month. History was also unkind to Jimmy Carter. From mid–1982 to

mid–1983, the inflation rate was 3.2 percent, almost the 3 percent that he had announced couldn’t be attained until at least 1988.

Other victims of this historical quirk were Walter Heller, Chairman of the Council

of Economic Advisors during the Kennedy years, and Nobel Laureate Paul SamuelVerDate 11-MAY-2000 09:23 Nov 21, 2008 Jkt 042514 PO 00000 Frm 00090 Fmt 6601 Sfmt 6621 C:\DOCS\42514.TXT DianeA PsN: DianeA
87

son. Heller’s fall from grace relates to the massive income-tax reduction that had

been enacted in 1981. When such a tax cut was first proposed in 1978, by Representative Jack Kemp and Senator William Roth, Heller offered the following evaluation: 12

‘‘A $114 billion tax cut in 3 years would simply overwhelm our existing productive

capacity with a tidal wave of increased demand and sweep away all hopes of . . .

containing inflation.’’

One can ask, legitimately, why the Reagan tax cuts of 1981 did not produce greater inflationary pressure. As to Paul Samuelson, his pessimism was almost

unbounded as the country moved into the eighties. He remarked: 13

‘‘A basic fact about present day Americans is our scaled down expectations. This

seems a rational rather than pathological reaction to what have been the realities

of the 1970s.’’

Add to that the almost grim forecast for the eighties he provided in his December

15, 1980 column in Newsweek magazine. What he saw was average levels of unemployment in excess of 8 percent, average rates of price inflation of more than 9 percent with frequent excursions into the double-digit range, and, perhaps, an average

growth rate in gross national product of 2 percent a year.

There was a downside to this unanticipated disinflation in the American economy.

It was such a surprise that money wage rates were now rising quite a bit more rapidly that prices. This squeezed the profitability of businesses and led to a significant

surge in unemployment. In September, 1982, the unemployment rate reached the

double-digit level for the first time since the Great Depression. In the fourth quarter

of 1982, the unemployment rate averaged 10.6 percent. Pessimism reigned. But, the

unemployment rate began to fall in January 1983. Still, the annual average unemployment rate for 1982 was 9.7 percent and, for 1983, 9.6 percent. These rather high

unemployment rates caused the 10-year moving average of the unemployment rate

to rise through 1984. At that point, it began to drop and has fallen in every year

since to reach its 2007 level of 4.9 percent.

Over the twenty-three consecutive year decline in the 10-year moving average unemployment rate, there have been two rather mild business cycles, one in the early

1990s and another in the early years of the first decade of this century. Also, the

economic philosophy of the era has been much less activist from the standpoint of

short run contra-cyclical economic policy. We believe this accounts for the sustained

decline in the longer run (ten year) average unemployment rate. This is consistent

with the conclusions we reached in a technical paper published several years ago.

In that paper, we demonstrated that short-run attempts at engaging in contra-cyclical macroeconomic policy will be counter-productive in the sense that it will produce

a less stable economy with a higher average unemployment rate. For anyone who

may be interested in the particulars of this argument, the paper is reproduced in

Appendix A.

This brings us to the current economic situation. We begin by noting that, recently, there has been substantial rhetoric that is quite reminiscent of Alvin Hansen

as he spoke in the late 1950’s urging policymakers to become more tolerant of some

additional amount of price inflation. This is the language that ultimately took the

United States economy down the path toward what became known as stagflation.

We should not follow that path again. Much that is good has happened in the last

quarter century. Let us not cast it away in a futile pursuit of some unattainable

perfection. Let us not repeat the errors of the past.

88

89

END NOTES

*This discussion is based largely on our book Out of Work: Unemployment and

Government in Twentieth Century America, Updated Edition (New York: New York

University Press, 1997).

1. Michael Sapir, ‘‘Review of Economic Forecasts for the Transition Period,’’ National Bureau of Economic Research, Studies in Income and Wealth 11 (1949), pp.

275–351.

2. Robert A. Gordon, Business Fluctuations, 2nd ed. (New York: Harper and Row,

1961), p. 454.

3. Alvin Hansen, ‘‘Economic Progress and Declining Population Growth,’’ American

Economic Review 29 (1939), pp. 1–15.

4. Alvin Hansen, After the War, Full Employment (Washington, D.C.: United States

National Resources Planning Boars, 1943), p. 5.

5. Reported in New York Times, September 7, 1945, p. 16.

6. See our Out of Work, op. cit., pp. 163–167.

7. Alvin Hansen, ‘‘The Case for High Pressure Economics,’’ reprinted in The Battle

Against Unemployment, Arthur Okun, ed. (New York: W. W. Norton, 1965), pp.

53–64.

8. Paul A. Samuelson and Robert M. Solow, ‘‘Analytical Aspects of Anti-Inflation

Policy,’’ American Economic Review 50 (1960), pp. 177–194.

9. The published proceedings bear a slightly different name than the conference

itself, namely, The Economy and the President: 1980 and Beyond (Englewood

Cliffs, N. J.: Prentice-Hall, 1980), p. 9.

10. Economic Report of the President, 1980 (Washington, D. C.: U.S. Government

Printing Office, 1980), pp. 9–10.

11. Otto Eckstein, ‘‘Choices for the Eighties,’’ in The Economy and to President, op.

cit., p. 76.

12 Walter Heller, ‘‘The Kemp-Roth-Laffer Free Lunch, Wall Street Journal, July 12,

1978, p. 20.

13. Paul A. Samuelson, ‘‘Outlook for the ‘80s,’’ Newsweek, December 15, 1980, p. 88.

90

APPENDIX A

‘‘The Fraud of Macroeconomic Stabilization Policy.’’

The Quarterly Journal of Austrian Economics

Volume 3, No. 3 (Fall, 2000), pp. 19–33

Lowell Gallaway and Richard Vedder

91

92

93

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95

Æ