Unemployment likely to remain high for two more years, IMF predicts

By Howard Schneider
Washington Post Foreign Service
Thursday, April 15, 2010

Economic recovery will do little to bring down unemployment rates in Europe, the United States and other developed countries for nearly two more years, the International Monetary Fund projected Wednesday in a report that highlighted the lingering challenges of the worst recession in decades.

Releasing what IMF officials called a "somber" forecast, the agency said government stimulus and other policies remain needed to offset slow private job creation -- evidence of the dilemma policymakers face as they decide whether trimming high government deficits outweighs the risk of undermining employment even further if public programs are cut.

High unemployment is one of the central issues confronting officials as they deal with the recession's aftermath.

While employment is expected to expand this year, the number of new jobs won't be enough to make up for a growing labor force and bring down the unemployment rate, the IMF said. The agency projected that the unemployment rate throughout the developed world will remain around 9 percent through 2011.

Labor markets suffered multiple shocks during the economic downturn. Jobs were lost because factory and business output fell, but employment was driven even lower by the financial crisis and the bust in housing prices. Consequently, the IMF said, it will take more than renewed economic growth for business hiring to rebound.

"The nature of the recent recession in several advanced economies . . . the high degree of financial stress and the high degree of uncertainty all weigh against a speedy recovery in job creation," the IMF said in the report issued in advance of its World Economic Outlook, due for release next week.

Governments, including that of the United States, should look at programs such as temporary hiring subsidies to encourage businesses to take on new workers, and they should keep interest rates low and fund projects that create jobs, the fund said.

The IMF projection is grim news for the United States, where unemployment is a relatively steep 9.7 percent and could be a central theme in midterm elections. Along with a stimulus program that pumped federal dollars into public works projects, the administration recently signed into law tax breaks for small businesses that hire new employees.

Also, the Obama administration has said that increasing U.S. exports would be one if its main strategies to create more jobs.

IMF officials encouraged developed nations to examine a range of policies to bolster job creation, such as relaxing the "two-tier" labor contracts that are common in some European countries and make it hard for younger workers to move beyond temporary contracts from which they can be easily laid off.

For the United States, the type of targeted job subsidies included in recent legislation could be helpful, said Ravi Balakrishnan, an IMF senior economist who helped prepare the employment report.

But, he said, the jobs those sorts of policies might create are "not a big chunk of change" given the number of unemployed and the estimated 300,000 new jobs needed in the United States each month to keep pace with population growth.

Rather, IMF officials said governments in advanced economies would need to continue to rely for now on the larger tools that can spur job growth -- low interest rates and continued government spending.

"The general gist is we need accommodative policy still," said Jorg Decressin, assistant director of research at the fund.

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