The Mystery of Stubborn Unemployment

Economists are debating whether the lingering joblessness is due to the weak recovery—or to a more important structural change. Both may be true.

Unemployment is a fairly simple concept. You either have a job or you don’t, unless you’ve given up looking for one. It doesn’t seem complicated. But leave it to economists to muddy matters. Because unemployment has proven so stubborn—the figures released this morning put it at almost 15 million, barely changed from a year ago—they’re trying to figure out why. Their latest debate focuses on whether the high joblessness is mostly “cyclical” or “structural.” Are people unemployed because businesses aren’t hiring—a reflection of the dismal business cycle? Or are they jobless because there’s some “structural” mismatch between job openings and the unemployed?

It’s a debate that matters for politics and policy, because a verdict of “cyclical” unemployment would bolster arguments for more government stimulus spending. But if joblessness is mainly “structural,” then the case for stimulus collapses. If the people businesses need aren’t available, then bigger government deficits or easier credit won’t help much.

Advocates of the structural unemployment argument have cited a growing gap between job openings and job creation. From July 2009 to July 2010, the rate of job openings rose by an impressive 30 percent, noted economist Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, in a recent speech. That suggested a stronger job market. So did a 10 percent decline in the rate layoffs and quits. Yet, the unemployment rate rose slightly, from 9.4 to 9.5 percent.

Somehow, jobs and people seem disconnected. Workers, it would seem, either lacked desired skills or the job openings don’t exist where most of the unemployed live. So, case closed? We’ve solved the mystery of stubborn unemployment.

Well, not exactly.
Common sense plus lots of other labor-force data indicate that most of today’s joblessness is cyclical. It reflects the savage recession and weak recovery. In 2005 and 2006, new housing starts (single-family homes and apartments) averaged about 1.9 million a year. Now, the rate has declined by two-thirds to about 600,000. If housing starts suddenly spurted to one million, does anyone doubt there’d be a leap in the number of employed carpenters, electricians, plumbers and laborers—not to mention architects and surveyors? Or take cars and light trucks. In 2005 and 2006, sales averaged almost 17 million; now, they’re at an annual rate of about 11.5 million. If they recovered to 14 million, does anyone doubt there’d be more auto workers and car salesmen?

Looking at the total economy reinforces the conclusion. In the second quarter of 2010, the economy’s output (gross domestic product) was still slightly below its peak in late 2007. So was consumer spending. If they were six or seven percent higher, there’d be many more employed engineers, sales clerks and software programmers. The office vacancy rate wouldn’t be hovering around 17 percent.
What happened instead is that the deep recession prompted businesses to conserve cash and protect profitability by huge layoffs. That’s the main reason why 8.4 million payroll jobs were lost and why non-farm private employment is still almost 7.8 million below its peak.

“Even if every single job opening…was filled, 80 percent of the unemployed would still be unemployed because there are no jobs for them,” concludes an analysis by the Economic Policy Institute, a liberal think tank. In late 2007, when the economy peaked, the number of unemployed workers for every job opening was 1.8, EPI notes. Now the ratio is a bleak 4.6 to one—almost five unemployed workers for every advertised job. EPI dismisses the likelihood that business “processes have [so] dramatically changed” that millions of Americans have suddenly become “unqualified for work.”

But the fact that most of today’s unemployment is cyclical doesn’t rule out structural joblessness. The longer people are out of work, the harder it is to find a new job. People loose workplace contacts; some skills atrophy or vanish, because they were tied to a specific company or a fading technology; potential employers are skeptical of applicants who are long-term jobless (about 40 percent of the unemployed have been jobless for more than six months). Slightly more than half the unemployed are 35 and over (almost 5 million are 45 and over). They may face age discrimination or, unable to sell their homes, can’t easily move to find work.

So, persisting cyclical unemployment feeds structural unemployment. The gap between rising job openings and stubborn unemployment may be one of those statistical puzzles that economists can’t unravel—or it may have a simple, common sense explanation. It could be that, in a weak economy, employers become more picky and cautious. They may advertise a job just to see who applies. Or they won’t hire anyone except an exceptionally qualified candidate. Or they won’t hire until they’re certain that their sales justify more workers. Some reported job “openings” may be phantom.

All this means that the debate over economic “stimulus,” though that term has fallen into disfavor, won’t vanish. With budget deficits already high and interest rates already low, what more the government can do is unclear. Greater “infrastructure” spending is the latest political fashion. But people will keep asking, because almost everyone agrees on the goal: more jobs.

Source: Newsweek
October 8, 2010

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