November 12, 2009

Unemployment's gloomy future


Unemployment. It’s Bad, and it’s going to get worse. As a Gen-Xer (though barely, I'm on the cusp of being a Boomer), I've looked at the Baby Boom generation with some disdain for dropping the ball given to them by the greatest generation. They endorsed radical expansion of government. They spent and spent and spent. They raised the national debt. They didn’t fix social program problems they inherited, instead expanding them and punting the costs down the road. They didn’t learn the lessons of the past and made a myriad of mistakes they could have avoided with some common sense. Of course, Gen-Xers are no better. In our defense, we weren't handed a ball so much as a half-rotten fruit. But we have taken that half-rotten fruit and grown even more stupid, and less patient and more feeling of being entitled than even the Boomers. Not to mention, lazier and fatter. And in defense of the Boomers, if they hadn't dropped the ball, we most certainly would have managed to do so. We've just been spared the blame as such.

 
I may be right or wrong on that.  But who cares about who is to blame anyway? An honest evaluation of the circumstances the Western World now finds itself in should only be looking at root causes and realistic solutions to the crisis at hand, as well as the systemic problems in world economies.

Growing older, from a strictly selfish perspective, I used to think about waves of Boomers starting to retire, and relish the resulting power vacuum with respect to job opportunity. Those of us held back as a result of a population bulge could not only gravitate towards our natural employment levels but in fact we would be sucked upwards by the vacuum of retirements. Not a bad proposition except that it amounts to a free lunch. We all know there is no such thing. All of those retirees will be feeding at the social security trough and that trough drastically needs filling with levies from the working population. Especially now.

 
No, I don't see it as more reason to blame the Boomer generation. They didn't ask to be a population bulge. The problem lies in a system built on unsustainable suppositions, and as it's been called, generational theft (spreading the wealth - over time not income band). The problem, as far as retirement goes is the system itself.

 
The situation as it has been with respect to social security has become even more complex as a result of this latest recession. With the housing bubble burst, many homeowners are in a situation called underwater - they owe more on their home than they can sell it for in the marketplace. With the precipitous drop in stock markets, values of assets held have declined steeply, wiping out over a trillion dollars in wealth. The market has recovered somewhat but there is still a net negative effect and no guarantee that a full market recovery to pre-crash levels is happening any time soon.

 
Meanwhile, the leading edge of the Baby Boom generation is now at retirement's doorstep. Do you suppose many of them are prepared to retire after the impact on their assets? Certainly not as many as 3 years ago, that's for sure. This brings us to the unemployment picture and a serious impact on it as a result of delayed retirements. Boomers once dreamed of early retirement. Now they are facing extended employment. That is unfortunate for them and depending on the level of impact of this recession on their wealth, potentially disastrous for future unemployment rates.

 
There are a number of signs that unemployment is still headed in the wrong direction, with no obvious end in sight. Consider;
  • 8 million jobs lost in the current recession
  • 3.3 million (55%) more working part-time (9 million total) than the high water mark of previous recessions
  • The equivalent of another 2.4 million jobs lost due to work week hour reductions
  • Previous recessions unemployment rates have peaked almost a percentage point higher and a year after the official end
  • Youth unemployment nearing 20%

That doesn’t even factor in the problem of under-employment relative to skill sets. Now add to that list the fact that there will be new graduates coming on line to the employment search environment. Their efforts will be complicated by a bulge in the population that is set to retire but won’t be in the numbers expected and will be competing for jobs (overall, not the same ones).

 
The relative numbers might be something that can be projected. Keep in mind these calculations are very rough and require a much more in depth analysis than below.

 

In 2006, there were an estimated 78.2 million baby boomers, and 7,918 of them turned 60 each day in 2006. So here’s the back-of-the-napkin math, assuming that 7,918 is a reasonable static indicator of birth rate for the entire baby boom generation (not a sound assumption but not horrible either):

  • 2.89 million people will reach retirement age starting this year and each year for the next 20 years.
  • In 2005, there was a projected 3.9 million people reaching age 22, 1.2 million of which would graduate from college
That means that despite the fact that there was a baby boom. There are more people coming online for employment than people leaving the work force through retirement (thanks to positive population growth). The situation is worsened if we assume 25% of those reaching retirement age do not retire, meaning the net retirement workforce reduction would be 2.17 million, versus 3.9 million new workers looking for jobs.

That’s 1.7 million more people looking for work than jobs opened through retirement per year as a result of population trends. That in turn means that 1.7 million jobs per year will need to be created just to for unemployment remain static and not increase. That’s 142,000 new jobs per month, outside of all of the existing circumstances. Granted those past 65 won’t remain in the workforce forever. But 5 years is not an unimaginable amount.


 

So when economist David Rosenberg argues that unemployment is headed higher, he makes a solid case, which is only furthered by the demographic issues the country is about to face. The employment situation in America is not recovering any time soon. That begs the question of whether Cap and Trade, health care reform, green jobs that will materialize in scant numbers only make any sort of sense right now (if ever)? It further begs the question of why there isn’t a rush to build nuclear power plants and aggressively promote domestic oil drilling as well. The path the Democrats have chosen has some serious implications for the country and depending on timing could presage electoral disaster come November 2010 and November 2012.

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