Unemployment at 9.8%: What Can Create Jobs?

Federal Reserve Chairman Ben Bernanke said last month that the recession is “very likely over,” but that the recovery isn't likely to create many jobs in the near-term.

The chairman's words were prescient. The unemployment rate jumped to 9.8% in September, up from 9.7% the month before, according to a report released Friday by the Labor Department. At the same time, the economy shed 263,000 jobs, marking the 21st consecutive month of job losses.

Economists say employment is a lagging indicator, so although the recession might be winding down or even technically behind us, hiring will take longer to catch up.

"The hole in the labor market is so enormous," says Heidi Shierholz, a labor economist at the Economic Policy Institute, a nonpartisan think tank in Washington, D.C. "In order to fully fill in that hole in two years, we’d need to add over half a million jobs every month between now and September 2011."

Moody's Economy.com, which provides economic research, doesn’t expect hiring to ramp up in earnest until 2010.

So what will it take for this crucial economic indicator to start looking up?

The federal fiscal stimulus package passed in February prevented the economy from worsening, Shierholz says, but the gap in the labor market is so wide that the $787 billion stimulus is not enough to close it.

One option is for the government to expand its safety-net programs, including further extensions of unemployment benefits and Cobra subsidies. This won’t directly impact hiring, but it will help those affected by the downturn keep their purchasing power, and in a sense create demand that could curb further layoffs.

“Getting money into the hands of people who are the most cash-strapped – they will have no choice but to spend the money immediately, and that’s what we need,” Shierholz says.

The stimulus package allocated billions of dollars for tasks like upgrading the country’s infrastructure, weatherizing schools, retrofitting buildings and implementing electronic medical record systems.

“We’re likely to see more hiring in those industries,” says Sophia Koropeckyj, a director at Moody’s Economy.com. But much of the spending on those initiatives won’t happen until next year – so a hiring boost in those sectors won’t be seen for a while.

The larger question, though, is how big the impact will be, she says. “I don’t think it’ll be sufficient to offset a lot of what’s going on in the private sector, but it will provide that first boost.”

Inventories have been drawn down to such an extent that manufacturers are being called into service to help restock shelves – in part because of the falling dollar.

A weak greenback usually makes U.S. goods more attractive abroad. And an increase in exports will spur more manufacturing activity – and hiring.

“The dollar has been falling for a few months, so maybe by early next year we’ll start to see benefits from that” in terms of manufacturing-related jobs, says Dean Baker, a co-director at the left-leaning Center for Economic Policy and Research.

Another idea the government might consider is a tax credit for employers as a way to encourage hiring, Baker says.

In Germany, the government now offers tax credits to companies that maintain the same number of employees but cut their hours. Assuming the demand stays the same, companies would need to hire more workers to make up for the labor loss. (Suppose the government gave employers 10% of their workers’ compensation and cut back their work hours by 10%. If the employer sees the same demand they did before, then they would hire more employees to shoulder the load.)