We have heard for months that recovery in the employment market will lag the economic rebound. This position is well grounded historically, as we have seen this phenomenon time and again. Until recently, I believed that the current recovery would follow the same pattern. But now I am forced to utter those four words that we so often regret- it’s different this time.

For one thing, previous recessions were neither as deep nor as long as this one. Credit was not choked-off. The combined effect of the prolonged decline and the lack of credit has had a profoundly negative impact on sentiment. Positive sentiment is an essential ingredient to spur hiring.

Plus, companies have enjoyed steadily increasing levels of productivity as significantly fewer employees have generated greater and greater output. The negative sentiment dampens optimism and the productivity increases have preserved margins. Hence, there is little desire or need to hire more employees.

Finally, incentive compensation is penetrating deeper in many companies than ever before as part of a shift from base to variable compensation. These incentive schemes typically reward achievement of operating income targets. In the short term, employees are additional expense and as such, a barrier to achieving the income targets.

The combined impact of these influences is currently being experienced and has been given a name, “the jobless recovery.”  Rest assured, there will come a time in the next few months when our economy will start adding jobs again. Simply not at the same rate as we experienced heretofore. I fear that this change is here to stay.

The days of 5% unemployment may well be gone forever. The “new normal” will likely be in the 8% range, driven by the structural changes highlighted above. The effect of this increased level of structural unemployment can not be underestimated. Reduced consumer demand, increased levels of taxation and continued high levels of government intervention are in our future.

Most significantly, the employment risk of the average American will increase precipitously. And while there are strategies to indemnify yourself from job loss, this high level of unemployment is here to stay. Welcome to the new employment reality.

This entry was posted on Saturday, December 19th, 2009 at 11:28 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.