The Lasting Impact of Unemployment

Joblessness leaves its mark on spending, young consumers.

The Unemployment Curve

The legacy of the Great Recession is starting out as a dull ache that could last a generation.

This story first appeared in the February 8, 2011 issue of WWD.  Subscribe Today.

And already it’s forcing retailers to totally rethink their businesses and their relationships with consumers as the effects of long-term unemployment ripple through the economy — particularly hitting those just getting out of school and learning to live in lean times.

Markets have rebounded from their death-defying tumble, government support helped nudge spending up last year and many consumers continue to believe that better times, while not here yet, are right around the corner.

But a significant chunk of the country is still hurting, and badly. For many of the 13.9 million people the government officially counted as out of work last month, “basics” are being redefined. It’s not just a question of wearing threadbare pants and shirts, but whether there’s enough money to visit the dentist or stock the cupboard.

And the weakness in the labor market has radiated out from the jobless, who are left licking their wounds, to Millennials who are finding their careers stinted and Baby Boomers who are putting off retirement.

“Things got so out of whack during the 2000-to-2008 period,” said Paul Nolte, managing director at investment firm Dearborn Partners in Chicago, referring to the boom years. “We’re now in a period where we’re trying to figure what the new equilibrium is. We’re a couple of years into what’s probably going to be an overall five- to 10-year period.”

The still-depressed housing market isn’t expected to show a more-consistent level of economic activity until 2013 to 2018 and Nolte said this leaves consumers whose wealth is wrapped up in their homes with a litany of unanswered questions:

“What is a normal spending level? I don’t know because my spending is being curtailed by my focus on paying down debt. What’s a normal real estate price? I don’t know.”

The official reading of unemployment fell last month, to 9 percent from 9.4 percent in December, but while this is an improvement it still leaves nearly one in 10 prospective workers looking for a job. Payrolls, which are tracked separately, expanded by just 36,000 for the month — 110,000 fewer new jobs than economists hoped for and well below the roughly 150,000 new jobs needed each month to keep up with population growth.

“This recession is both going to be severe and pretty persistent,” said Harry Holzer, professor of public policy at Georgetown University and former chief economist at the Labor Department. “It’s going to take a good five years, maybe more than that, for the labor market to fully recover from it.”

Holzer singled out three groups that will bear the brunt of the unemployment pain: the long-term unemployed, children of people who have lost a job, and young people of working age.

It’s perhaps young people just getting out of school who will feel weakness in the labor market most acutely.

“They may get jobs, but they’re going to take a hit on their earnings,” Holzer said. “The evidence suggests that can last well beyond the period of recession. You’re on an upward escalator [income-wise], but you’re starting on a lower level.”

The generation just entering the workforce grew up in a golden period of economic expansion, yet is coming of age with less spending money. That means that, at least for the next decade, they will be keeping their belts tight — spending less on apparel, entertainment, restaurants and other treats than their Baby Boomer parents did.

On top of that is their tech saviness and attitudes toward the environment and social responsibility.

“They’re like cookies coming out of the oven,” said Nancy Koehn, a retail historian at the Harvard Business School. “They’re hardening in this environment. There’s no question it’s going to affect how they think about what they buy, how they approach consumption.”

Stores are going to have meet the cash-strapped Millennials on their home turf. For example, Koehn said savvy retailers would figure out how to run eBay-style promotions, which allow real-time give and take over price.

Already, shoppers are bringing that attitude to stores. On a recent trip to Saks Fifth Avenue, Koehn said someone asked a saleswoman if the store could offer a better price on an item. It’s not hard to imagine the offense a saleswoman in the Eighties would have mustered; her current-day counterpart said she’d check.

The change in attitude suggests retailers are going to have to find new ways to figure out their consumers and how they’re changing if they want to keep up and stay relevant — which isn’t easy even in good economic times.

“You really want to be like a taxi cab driver sitting around doing anthropology person by person, asking them their stories, peeking into their closet, peeking into their medicine chests, looking into their jewelry boxes and figure out what they’re doing,” Koehn said. “What they’re doing now is like a canary down the mine shaft.”

Millennials — who range from about 10 years old to around 30 and because of their youth represent the future of the economy — could be particularly hard for old-line retailers to understand.

Many carry heavy debt burdens and can expect to have nearly seven jobs by the time they’re 30, said Erica Orange, vice president at consulting firm Weiner, Edrich, Brown Inc.

“Talk about not having a steady paycheck, benefits or linear job path,” Orange said. “Those things don’t really exist anymore. As consumers, they will be drawn to retailers that offer things such as flash sales (Gilt Groupe), or coupon sites (Groupon) or sites that offer significant discounts (Lifebooker).”

Orange was also feeling the eBay vibe: “The ‘auction economy’ is going to be a big one for Millennials,” she said.

Retailers get mixed grades for speaking to this generation, she added. Some are sticking with a retail model that worked for past generations, but won’t necessarily speak to younger shoppers. “The key words for retailers as it pertains to the Millennial generation are: empowerment, immersion and engagement,” she said. “Retailers should be working to make the experience a multidimensional — rather than a one-dimensional — one.”

She pointed to Forever 21’s Times Square billboard, which uses high-tech surveillance equipment to interact with people on the street, as the right approach.

Figuring out how to sell to an increasingly tech-savvy shopper settling in during tough times could be the secret to surviving, given the larger economic context.

Jonathan Low, a partner and co-founder of Predictiv Consulting, said the downturn is just part of a “great balancing globally.”

“India and China and Eastern Europe and even Africa and South America are getting a closer approximation of what their output would realistically suggest they should get,” he said. “The environment that we [in the U.S.] consider normal and our right has increasingly come to be looked upon as an anomaly. We had a 30-year run of relatively little competition globally and now that competition is back.”

Already, it’s felt like a long slog. The jobless rate has been at least 9 percent for 21 months, a record run that is worse than it looks. Unemployment last month totaled 16.1 percent when including people only marginally attached to the workforce. The percentage of people who spent some time out of work last year or who had someone in their immediate family searching for work would be much higher.

And no one knows the full impact of this crazy train of joblessness, nor how long the ride will go on.

“When a man learns that he may lose his job, within 14 days he and his family begin showing physical symptoms,” said Thomas Cottle, sociologist, psychologist, Boston University professor and author of “Hardest Times: The Trauma of Long-Term Unemployment” (Praeger).

The anxiety can cause headaches and stomachaches, people start eating and drinking more and skipping preventive medical visits, Cottle said.

“With unemployment you see a rise in tooth decay,” he said, noting the attitude becomes: “‘I’ll cut my own hair and the hell with my teeth.’ You’re on the precipice of getting ill.” And he said the groups vulnerable to the onset of mental illness — ages 18 to 24 and 54 to 58 — are also among the hardest hit by unemployment.

The scars can run deep.

“It is a form of trauma,” said Cottle of losing a job. “It is a real wound and once you’re wounded, you’re going to have post-trauma symptoms and so are the people close to you, your family. They’re going to react in some way to your depression.”

The Great Depression left a generation that learned to stash money under their mattresses and mix stale bread in with their scrambled eggs.

What marks the current downturn will leave remains an open question, perhaps the key question for the next generation of retail executives.