In his testimony last week, the Federal Reserve chairman, Ben Bernanke, warned that the sharp rise in the cost of short-term credit, and the corresponding difficulty that companies and individuals face if they want to obtain a loan, pose “a direct threat to economic growth.” Just as important for most Americans is the threat to their jobs. What does the credit crunch mean for job growth? Is your job in jeopardy?
As I explain below, this financial crisis is likely to threaten middle- and upper-income jobs to a greater extent than has been the case in past recessions.
There is little doubt that the crisis has already hurt job growth. The unemployment rate has climbed from 5.1 percent when Bear Stearns was taken over by JPMorgan Chase with the Fed’s help in March 2008 to 6.1 percent last month. And the unemployment rate is likely to rise further — and remain high for a considerable period after the financial crisis subsides and economic growth resumes.
Obviously, jobs in the banking, finance, construction and residential real estate sectors will take a direct hit because the problem started with a bubble in home prices. But the damage is likely to spread to other sectors. Industries that rely on customers who use credit to buy their goods are especially vulnerable. Thus jobs in durable goods manufacturing — such as autos, heavy household appliances and business equipment — are likely to be hit hard.
Historically, most downturns have hit the least-skilled the hardest, as employers hold on to workers with unique skills who would be expensive to replace. This downturn, however, is likely to be more democratic than the norm because of the severity of the credit crunch. Research indicates that employers hire relatively more skilled workers when they invest in new plant and equipment, especially high-tech information and computing equipment (the so-called “capital-skill complementarity” hypothesis). If funds for investment are not available because of the financial crisis, however, companies will hire fewer skilled workers.
Consistent with this prediction, initial signs indicate that the employment shock has been felt more by college graduates than by those with a high school degree or less. The seasonally adjusted share of college graduates who are employed fell by 1.6 percentage points from March to August 2008, while the share of high school graduates and high school dropouts employed rose by 0.6 and 0.2 percentage points, respectively. (See chart below.)
What does this mean for you? Even in the best of times the United States labor market is highly volatile, with millions of jobs being created and destroyed each month. But just because your job may have been safe in past downturns does not mean it will be secure this time. Key questions you should ask are: Does your company need investment funds to upgrade plant and equipment to compete with other companies? Do your customers rely mainly on credit to buy your product or service? Do you do business with companies that are hard hit by the financial crisis? If your answers to these questions are yes, your job is more likely to be at risk.
