Real Estate Forum - September 2011

rebound in employment is unlikely, since layoffs are painful for companies and likely to be more permanent than hiring freezes.

While part of the recent weakness in the job market are transitory due to supply disruptions from Japan’s earthquake, the run-up in energy prices, and poor weather, several long term structural and cyclical factors are impacting the U.S. labor market and point to a slow, fitful recovery spanning years before we return to 5. 5–6.0% unemployment:

 More than 45% ( 6. 5 million people) of the unemployed have been out of work for 6 months, and 30% ( 4. 5 million) have been out for longer than one year. This group is unlikely to find work soon, as many employers concerned about employee skills are now specifying in their job postings that they prefer people who are either employed or have been out of work for only a short period.

 Faced with yawning deficits of close to $90 billion during fiscal 2012, state and local governments are expected to continue to lay off workers. State and local governments have cut more than 175,000 jobs this year (over 577,000 jobs since 2008) and may lay off another 350,000–400,000 employees by the end of 2012. Layoffs in the government sector are especially painful, since government workers tend to be paid more highly than those with similar jobs in the private sector.

 The severity of the recession has led many companies to focus on structural changes for reducing or limiting labor costs. Changes include investing in labor-saving technologies, reorganizing to improve efficiency, relocating labor-intensive operations to low-wage countries, and shifting from exporting products to moving manufacturing plants abroad closer to foreign markets. As a result, not many of the two million employees laid off in manufacturing during the past two to three years will likely be rehired—much fewer than the 6 million manufacturing jobs lost since 2000.

 Business is viewing labor as a variable cost—
temporary workers are used to meet
demands as needed. In the past, many
companies “hoarded” excess workers
during a downturn as a way of avoiding
hiring and re-training costs. McKinsey Global
Institute found in a recent survey of 2,000
companies that 58% of employers expect to
use more part-time or temporary contract
workers during the next five years. The survey
also found that 21.5% of respondents
expected to outsource work both in the
United States and abroad.

 Labor market trends are working against highly paid, geographically settled, middle-aged workers who were among the first to be laid off during the downturn. This group lost 900,000 jobs during those two years and is being squeezed at one end by mobile, young workers who have strong computer skills and/or are willing to take lower-paying entry-level jobs, and at the other end by older workers who, realizing they can’t afford to retire, are staying at their jobs longer and/or are willing to work part time with few benefits.

 Two historically key drivers of employment growth— construction and small businesses—are struggling and unlikely to rebound near term. The construction sector has been one of the hardest hit in the economic downturn. The 8,000 construction jobs added in July were merely a drop in the bucket, as construction employment totaled 5. 5 million, down more than 28% ( 1. 6 million) since 2006. Given the depressed state of the housing market and the lack of construction financing for nonresidential building, combined with relatively high vacancy rates in commercial real estate markets, any meaningful increase in construction employment is unlikely near term.

The other key engine of employment growth is small businesses, which historically account for close to 50% of new-job creation. Small businesses continue to struggle to gain their footing in today’s slow, uncertain economic environment. Demand for goods and services remains depressed, margins continue under pressure (as rising input costs outstrip the ability of small