Permanent unemployment?

It looks like Europe may be heading that way.  The Telegraph reports:

Defined as being out of work for more than a year, long-term unemployment is a dangerous development that keeps economists awake at night. It is rising despite the euro's recent revival in fortunes. In Europe, around 15pc of unemployed people have not had a job for more than four years.

This gradual loss in valuable skills needed to re-enter the workforce, leads to a phenomenon economists have dubbed "hysteresis". This is when periods of prolonged unemployment can become permanent.

. . .

Hysteresis is a sclerotic process that takes hold in economies in a state of perma-recession. Greece is arguably the best example in the eurozone – having suffered a downturn of greater magnitude than the US Great Depression of the 1930s.

Governor of the Bank of England Mark Carney has warned western policymakers to engage in a "race against hysteresis". Mario Draghi of the European Central Bank has surmised it as the process when "cyclical unemployment becomes structural".

But persistent unemployment is not merely a scourge to those who suffer being shut of the workforce.

Larry Summers - who has revived the notion of "secular stagnation" - has spoken of hysteresis in the same breath as the long-term decline in potential growth rates across the developed world.

They are two sides of the same coin.

The forces of hysteresis are "a shadow cast forward on economic activity” according to Mr Summers. By heightening a natural rate of unemployment, this then has spillover effects which can destroy the future growth of an economy in years to come. It is a self-reinforcing cycle of stagnation and labour force ruin.

. . .

According to European Central Bank's own calculations, the near 11pc unemployment rate is here to stay. Even in an optimistic case, it will only fall to 9pc in 2020 when the eurozone's economic slack has been used up, according to the IMF.

There's more at the link.

I've seen this phenomenon in certain countries in Africa.  It's genuinely frightening - it can lead to the disintegration of social order and stability.  You see, employers will always hire the cheapest possible solution to their needs.  That involves not only those willing to work for the lowest wage, but those requiring the least training for a new position.  Very often, younger workers are cheaper than older;  and often, those younger workers have more up-to-date skills that can be adapted to the job than older workers whose exposure to, for example, computers or roboticized manufacturing techniques is much less than the younger generation.  As a result, those without recent work experience get 'shut out' of the job market.

When this happens often enough and for long enough, you get a class of people that's not only permanently unemployed, but is also basically unemployable.  Their skills and education have atrophied.  They no longer regard themselves as having any value to an employer;  therefore, they don't see themselves as having any value to their families, or even to society as a whole.  The result is a vast increase in criminal activity - after all, the new criminals reason, if they're of no value to anyone, why shouldn't they take value from those that have it?

This has occurred in many African countries, and I've seen it there. In South Africa, with which I'm most familiar, the disparities in education under apartheid resulted in a black population that was deliberately and officially under-educated.  A black Grade 12 education was considered equivalent to a white Grade 8.  Millions upon millions of people were not educated to the point that they could work in anything other than manual labor and associated occupations (e.g. mining, agriculture, etc.).  When automation resulted in the wholesale loss of jobs from those sectors, those millions found themselves thrown out on the street with no prospects at all . . . and they've never recovered.  The unemployment rate among black people in South Africa is officially estimated to be in the 25% range (or higher, depending on the statistics one uses), but unofficial estimates put it at closer to 40% as far as the formal economy is concerned.  Millions try to survive in the informal economy, working for cash wages, selling items in roadside stalls, doing anything they can to survive.  Many of them turn to crime - the statistics are horrendous.

The problem isn't as bad in Europe . . . yet.  Nevertheless, the early symptoms are not dissimilar.  If there's any further breakdown in society as a result of bad economic choices, the consequences may become not unlike those in parts of Africa.  I don't think Europe is aware of the danger yet . . . nor is the USA, where the problem is not quite so bad, but increasing.

Peter