Economic Sting Will Linger in Hard-Hit Places

October 16, 2010 at 12:38 pm Leave a comment

Those communities hardest-hit during the recession and slow recovery could continue to fall behind the rest of the country for decades.

Nearly three decades after the 1980s recession, those areas most damaged are still lagging behind. A similar fate could be in store for those localities that faced the deepest housing and employment shocks in the latest downturn.

In regions that suffered disproportionately in the 1980s recession, average earnings have risen at a quarter of the rate of the rest of the U.S. Employment grew more slowly, young people left the region, the population grew more slowly and, as a result, demand for housing weakened. To avoid repeating that scenario, a series of targeted revitalization efforts should be used to help the most distressed communities, according to a set of papers released Wednesday at an event by the Brookings Institution’s Hamilton Project. The proposals focus on attracting new business, helping displaced workers and matching workers to new jobs in those areas where the economy won’t simply snap back.

“This is a structural change,” Michigan Gov. Jennifer Granholm, a Democrat, said at the event. “The economy is just not going to come back the way it has before.” Michigan, a longtime auto industry state that now suffers from 13.1% unemployment and 15.7% joblessness in the Detroit area, is something of a poster child of a distressed community. The state has been working to diversify its economy, bolster manufacturing and retrain its work force.

Manufacturing has suffered acutely during the recession, and in one proposal to help spur business productivity and employment in the sector, Timothy Bartik of the Upjohn Institute for Employment Research, suggested an expansion of the Manufacturing Extension Partnership. The program advises small and medium-sized manufacturers on how to improve competitiveness.

Job training has been a prominent issue during a recession that’s led to massive declines in employment, particularly in sectors such as construction where hiring isn’t likely to rebound to pre-recession levels. For those who’ve been laid off, the effects can be long-lasting. Workers unemployed in the early 1980s suffered a 30% drop in income in the year after losing a job. A decade later their earnings were still 20% lower than their peers who managed to keep their jobs.

Retraining can help mitigate these losses, the University of Chicago’s Robert LaLonde and the Federal Reserve Bank of Chicago’s Daniel Sullivan argue. They proposed extending Pell Grants to reemployed workers who’ve accepted jobs at lower wages and ramping up federal funding for community colleges, a move the Obama administration has committed to.

The catch is that retraining doesn’t hold the same benefits for all workers. Those who are younger, female and have had some experience in post-secondary education are most likely to benefit. Vocational technical programs tend to be most effective. But that doesn’t solve the problem of the 2.6 million unemployed men age 45 and up.

For some workers, moving to an area with a healthier job market may be the best option. Slowing migration has been a concern during the recession and some experts argue that improving mobility could help improve employment. To increase mobility, the University of Chicago’s Jens Ludwig and the University of California, Berkeley’s Steven Raphael proposed a mobility bank that would provide loans of up to $10,000 to unemployed people looking to move. The cost would run the government between $500 and $800 million annually, they estimate.

But in the current economic climate it’s not clear such a loan could inspire a big change. Roughly a fifth of unemployed workers are underwater homeowners, according to the report. For someone in that case, $10,000 likely isn’t enough to free them from their homes.

“Can I guarantee that the mobility bank will work? Absolutely not,” Mr. Ludwig said, but because the program cost mainly depends on demand, there’s relatively little to lose.

A key to the Hamilton proposals is to target only the most distressed areas; for example, only the 20% with the highest unemployment rates. But that could also be their downfall. Practically speaking, Congress may not be willing to get behind programs that benefit states unequally.

Cost is another factor. In many of these programs, their creators say, the benefits exceed the expenses to fund them — and the price tags are relatively small. But Congress has shied away from spending more money to boost the economy amid a rising tide of deficit concerns. That could mean that, for these programs to come to fruition, state and local governments would have to make space in their already strained budgets.

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Entry filed under: Brookings Institute, Economy. Tags: , , , .

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