Page last updated at 13:31 GMT, Friday, 9 January 2009

Why is US unemployment rising?

Laid-off workers outside a factory in Chicago
Rules governing laid-off workers - like these in Chicago - are tougher in Europe

US unemployment rose to 7.2% in December, with the numbers employed shrinking by 2.6 million, the largest yearly loss since 1945.

What are the reasons for the fall in employment, and what effects might it have?

Why is unemployment rising?

US unemployment is rising sharply because companies are convinced that the economic slowdown will be severe and prolonged.

They are therefore planning to cut output more sharply in the coming year, and also need to reduce overheads in order to try to minimize losses.

The speed of the rise in unemployment has taken some observers by surprise.

US companies have generally moved faster to cut jobs because there are fewer costs or constraints on such actions - compared to Europe - where there are tougher requirements for consultation or statutory redundancy pay.

What are its effects?

Rising unemployment can have a self-reinforcing effect on the economy, further weakening demand and prolonging the recession.

The effect could be particularly significant on the housing market, which is already in its second year of decline.

Long-term unemployment also has a significant effect on the poverty rate in the US, especially as few workers are eligible for unemployment benefits and these generally last for only a short time.

Falling unemployment in the 1990s contributed to a sharp drop in the poverty rate, particularly among ethnic minorities and female-headed households.

Will it continue to go up?

Many experts believe that unemployment will keep rising in 2009, and perhaps into 2010 as well.

This is because unemployment is a lagging indicator.

Firms do not lay off workers at the beginning of a recession, since it is expensive to recruit new workers, and they wait until there are clear signs of increased demand before taking on new staff.

How long unemployment will continue to rise will be closely related to the length of the US recession, which is already set to become the longest in post-war history.

Which sectors are worst affected?

The rise in unemployment began in the manufacturing sector, but construction has been particularly affected because of the decline in the housing market.

In recent months, however, service sector jobs, particularly in retailing, have declined, and seasonal hiring in retail over the Christmas period was lower than usual.

Now the jobs losses have also spread to the transportation and financial services sector.

The one area of the economy where jobs are still growing is health care.

What can be done about it?

The new Obama administration is proposing an $800bn (526bn) stimulus package to boost the US economy, which it says is aimed at creating 3 million jobs over the next two years.

Much of package is made up of spending on infrastructure projects, such as improvements to roads, bridges, classrooms and hospitals.

However, there is some question whether the money can be spent quickly enough to reverse the decline in employment, and whether the effect will be temporary.

But if the stimulus package succeeds in stabilising the economy, with an upturn beginning toward the end of 2009, it is possible that private sector firms could be persuaded to start hiring again.

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