Job loss ripple effects

The U.S. Labor Department recently reported that unemployment spiked significantly — we are at a 16-year high. The unemployment rate itself is at a 14-year high. President Bush said last week that he would sign legislation to extend unemployment benefits for another 13 weeks.  

And, we are also seeing giant announcements of layoffs in the financial industry: 52,000 jobs or so, the biggest cut by a corporation in 15 years from Citigroup.  Fidelity, the financial services firm, is cutting 1,700 jobs.  Sun Microsystems is going to lay off 6,000 people, 18% of its workforce.

Recent estimates of a worst-case scenario of unemployment that would follow the collapse of the U.S. auto manufacture industry have ranged from 2-3 million.  Many of those potential losses would come from jobs lost due to a ripple effect from positions that are indirectly involved, mainly service and supply companies.  Gus Faucher, director of macroeconomics for Moody’s Economy.com, explains what a similar scenario would look like for the financial industry.

"It’s pretty high, and particularly in the financial sector, a lot of those jobs are very well-paying.  So, we are going to see people in consumer services who supply those folks, those people are going to lose their jobs as well.  So we think by the time all is said and done, we’ll probably see job losses somewhere 2-2.5 million, and that is if none of the Big Three (auto manufacturers) go bankrupt.  If one of them or more does, we are going to see even more job losses."

Unemployment in this economic crisis has had a different makeup at various stages along its timeline.  Faucher continues, "Certainly this recession started in the housing market, so we first started to see job losses in construction, and then in industries that are tied to the housing market.  Your home improvement superstores, your building material suppliers, that kind of thing.  But now, we are seeing much more widespread job losses.  We are seeing it throughout manufacturing, we are seeing it especially in financial services, but we’ll see more and more job losses in regular consumer services, in business and professional services that help the financial services industry.  And, I think by the time we are all said and done there are going to be job losses throughout the economy."

The most recent financial crisis to compare our current one would be that of the 1980s.  How does this one compare to the one nearly a quarter century ago?

"Certainly so far, this isn’t as bad as what happened in the 1980s, and I don’t expect that it is going to be that bad," says Faucher.  "Back then, we had double-digit inflation, and the Federal Reserve moved interest rates up to 20% in order to choke off inflation.  That led to a huge correction in the housing market.  We saw an enormous restructuring in the auto industry.  The unemployment rate then got to 11%.  I don’t think it is going to get anywhere close to that this time.  Although, it is probably still going to be the highest since that period."

Faucher points to the more flexible structure of the U.S. economy as one of the reasons to anticipate a milder crisis.  "If people do get laid off, there are opportunities in other sectors.  And I also think we are having a much more responsive fiscal policy."

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