Higher jobless rate may become the norm as many jobs vanish forever

Post-recession America may be saddled with high unemployment even after good times finally return.

Hundreds of thousands of jobs have vanished forever in industries such as auto manufacturing and financial services.

Millions of people who were fired or laid off will find it harder to get hired again and for years may have to accept lower earnings than they enjoyed before the slump.

This restructuring is causing some economists to reconsider what might be the "natural" rate of unemployment: a level that neither accelerates nor decelerates inflation. This state of equilibrium is often described as "full" employment.

Fallout from the recession implies a "markedly higher" natural rate of unemployment, says Edmund Phelps, a professor at Columbia University and winner of the 2006 Nobel Prize in economics.

"It was 5.5 percent; maybe it will be 6.5 percent, maybe 7 percent."

That has implications for policymakers, as well as workers. The Obama administration and the Federal Reserve are counting on the jobless rate to fall to a medium-term equilibrium of about 5 percent as the economy recovers.

A natural rate significantly above that would drive up the annual budget deficit — which will top $1 trillion for the first time this year — by reducing tax revenue and pushing up spending on unemployment benefits.

A higher rate would also require the Fed to make a choice: Accept an economy with more Americans permanently out of work, or try to boost employment at the risk of heating up inflation.

Laurence Ball, an economics professor at Johns Hopkins University, says unemployment may peak at 10 percent, and "it will be a long time before we see 5 percent" again.

The more time workers spend without a job, the less attractive they become to potential employers, Ball says, because they are not keeping up with new technology. That in itself helps keep the unemployment rate elevated.

A burst of productivity growth starting in the mid-1990s helped lower the natural rate of unemployment to around 5 percent from 6 percent, as profit-flush companies took on more workers. Now the fear is that will be reversed as industries downsize.

Already, almost a quarter of the unemployed have been out of work for 27 weeks or longer, the highest proportion since 1983. Permanent layoffs — for workers who don't expect to ever regain the same job — hit a record 51.5 percent in March. Mass layoffs, those that affect 50 or more people, rose to a record 2,933, comprising almost 300,000 lost positions.

"We're shedding jobs in industries in a significant way, and we're not going to see those same industries be the source of job creation," said Bruce Kasman, chief economist at JPMorgan Chase. About 27 percent of automotive-manufacturing jobs — roughly 257,000 — have been cut during the recession as carmakers trim operations.

Employment in the financial sector — which has seen the demise of investment banks Bear Stearns and Lehman Brothers — has contracted by 4.5 percent, or 376,000, with more losses to come.