by Mortimer B. Zuckerman

Even the 9.6 percent unemployment rate underplays the economic disaster

America's private-sector jobs machine has been the marvel of the economic world since 1940. When farm jobs were eliminated by mechanization, factories hired more. When factories increased productivity and moved work offshore, jobs opened up in services such as healthcare and education. Today that machine is clanging to a halt. For the man in the street, these are the worst times since the 1930s. Even those who have not suffered know someone -- a friend, a neighbor, a family member -- who is being hurt. A majority of Americans worry that the recession is far from over.

The history of job numbers gives no cause for optimism.

Private-sector jobs increased about 3.5 percent a year from the 1950s through the 1970s, 2.4 percent in the 1980s and 1990s, and less than 1 percent annually during the last decade. From 1985 to 2008, U.S. unemployment averaged 5.6 percent, compared with about 7.5 percent for the six largest economies in the European Union. Today, many of those countries now have lower unemployment rates than ours. In the 10 years after December 1989, the U.S. economy gained 21.7 million jobs. By contrast, from December 1999 through December 2009, we lost 944,000 jobs. Even without counting the end-of-decade recession, and comparing the first eight years of the 1990s to the same span in the 2000s, payroll employment rose by less than half -- under 7.5 million jobs compared with nearly 16 million.

The composition of this unemployment is equally troubling.

In the normal cycle, the men and women laid off can expect to be taken on again somewhere. Not now. Millions have been looking for work for six months. One opening has hundreds seeking to fill it. The rise in unemployment among permanent jobholders (that is, jobholders not on temporary layoff) is astounding. The rate rose from 1.7 percent in 2007 to a 5.6 percent peak in October 2009, and still remains at about 5 percent. Similarly, the long-term unemployment rate, as a share of the labor force as a whole, increased from 0.9 percent in November 2007 to 4.4 percent in June 2010, way above the previous postwar peak of 2.6 percent in June 1983.

Perhaps most troubling is the proportion of unemployed who have been out of work for six months or more: a remarkable 42 percent, according to the latest data from the Bureau of Labor Statistics. The concern is that as the spell of unemployment lengthens, skills erode and behaviors tend to change, leaving some people unqualified for the work they once did well. They face the horrible prospect that they may never work again.

Those with high school diplomas have an unemployment rate of 9.7 percent, compared with 5 percent for those with at least a bachelor's degree. Even recent college graduates have suffered. According to the National Association of Colleges and Employers, job offers to graduating seniors declined 21 percent last year and are expected to decline as much as 7 percent more this year.

The headline unemployment number underplays the disaster.

The 9.6 percent quoted does not reflect those who have stopped looking for work since mid-2008 -- that would give a rate of over 11 percent. Private incomes remain about 5.4 percent below the level of the third quarter of 2008, a dramatically bigger drop than in any previous postwar cycle, when private incomes never declined at all.

The true figure of our jobs predicament is 17 percent: the combination of the unemployed and the underemployed -- those who can only find part-time work. That 17 percent is the highest figure since the 1930s.

Men are bearing the brunt of the crunch.

Recently, their unemployment rate was 11.4 percent; women's was 8.8 percent, making for the largest jobless gender gap since tracking became possible in 1948. Why? Because men predominate in manufacturing and construction, the hardest-hit sectors, which have lost almost 4 million jobs since December 2007. Women, by contrast, are a majority in recession-resistant fields such as education and healthcare, which gained slightly fewer than 600,000 jobs during the same period.

Finally, 2 1/2 years into the most stimulative monetary and fiscal policy in our history -- with fiscal deficits running at twice the rate that President Franklin Roosevelt ran during the Great Depression -- the economy, at best, added just about 600,000 jobs. Compare that with the 8 million more jobs we need just to return us to the peak of December 2007, when our troubles started. We are way behind where we were in all previous recoveries. This time only 9 percent of the recession losses have been recouped from the lows in employment in December 2009.

Of course companies have been nervous about expanding payrolls.

They worry workers will simply be too costly, something they don't have to worry about when they simply buy more equipment and software, or outsource abroad. Automation alone has helped manufacturing cut 5.6 million jobs since the year 2000. Companies have been hiring temporary workers and increasing the work week for existing staff members, leading to big productivity gains. And there's anxiety that our deficits mean higher taxes for both businesses and consumers.

The question is inescapable: Is something wrong with the jobs machine that lies at the heart of the American economy, something that may be much more structural than cyclical? It is now estimated that structural unemployment has risen from 5 percent before the crisis to about 6.75 percent. This means that one-third of the rise in American joblessness may be impervious to the business cycle and cannot be solved by boosting demand.

Why is this?

First, as a Morgan Stanley analysis points out, high and rapidly rising healthcare costs are a disincentive to hiring.

Second, the weakness of the overall American economy has intensified efforts to cut payrolls by boosting productivity.

Third, there are mismatches between skills needed and those available. A Manpower Inc. survey this year showed that even in the recession, 14 percent of firms had difficulty finding suitable talent.

Finally, the negative equity in housing is a drag on mobility.

The rise of information technology has vastly accelerated the offshoring of manufacturing capacity and the efficiency of manufacturing at home. Automobiles, manufacturing, home building, and banking can no longer be expected to lead the way out of the recession.

Clearly this means policymakers must exert energy and imagination to deal with structural unemployment.

We have to think beyond the stimulus and adopt more targeted policies to help the millions of Americans stuck in the wrong places with the wrong skills. Retraining, yes, but for what? The private sector has to be the focus, not the public sector and government jobs. Private-sector job creation must be the No. 1 objective of economic policy.

Look at startups, particularly in high-tech manufacturing.

They are wonderful but cannot alone increase employment in technology. The key transformation is when technology goes from prototype to mass production; that is when companies "scale up." That's when they figure out how to make things affordably, and build factories, and hire people by the thousands. Andy Grove, founder of the Intel Corp., has written that a scaling-up process no longer occurs in the United States because American companies have discovered that manufacturing, and even engineering, can be done much less expensively overseas. Take the computer industry. Computer manufacturers employ about 166,000 people in the United States these days, according to Grove, fewer than before the first computer was assembled here in 1975. By contrast, Asia now employs about 1.5 million workers in its effective computer manufacturing industry.

Scaling is the critical pivot point because that's where the jobs are. But it goes beyond that, for without scaling we lose our hold on new technologies, ultimately diminishing our capacity to innovate. We should develop a series of large industrial parks with government financing to help speed up the slow local approval process. If we build technology manufacturing plants quickly, we can accelerate the transformation of startups into larger scale manufacturing.

But it is no use developing physical capital without cultivating financial and intellectual assets too. And the latter is the most important to reverse the flow of high-tech manufacturing abroad. We must cherish talent. We must increase the number of H1B visas for highly educated foreign students, who get roughly 50 percent of the graduate degrees in the hard sciences. In 2000, we issued 195,000 such visas; the annual figure now is only 65,000. The others we send home to compete against us. No wonder that Bill Gates thinks that increasing the number of H1B visas is the most critical step to grow technology manufacturing. He understands that the presence of this talent creates jobs, not eliminates them, particularly in a country with a great tradition and talent for the integration of immigrants.

Time is running out. The United States, which led the history of innovation, must lead again.

The American Jobs Machine is Clanging to a Halt