Personal Finance: Structural unemployment an underlying problem

Personal Finance: Structural unemployment an underlying problem

July 13th, 2011 by By Chris Hopkins in Business Diary

The June employment report from the Bureau of Labor Statistics would have been viewed as punk under any circumstances. But given the stage of the recovery and the massive doses of fiscal and monetary stimulus applied to date, the numbers were simply dismal.

Two years past the end of the recession, the U.S. economy created only 18,000 nonfarm jobs, while the unemployment rate ratcheted up to 9.2 percent.

Economists had expected 100,000 jobs, and even the most pessimistic forecasters were caught off guard. Grasping desperately for any evidence of life, The Wall Street Journal noted that at least the tiny "green energy" sector was adding jobs more quickly than the broader economy. Other than that Mrs. Lincoln, how did you enjoy the play?

The languid employment picture has economists worried about the fortitude of the recovery. However, the real story here is the disturbing trend in the underlying data pointing to much higher struc-

tural unemployment. This term is used to describe the segment of the jobless population that is essentially locked out of the market due to a mismatch in skills or a shift in demographics.

One clue to the increase in structural unemployment is a relationship economists call the Beveridge curve, which plots job openings against the unemployment rate.

Generally, the job vacancy rate declines as unemployment increases (as one would expect). However, the curve seems to have shifted sharply upward, implying that employers are unable to fill many critical positions even as 14 million people are out of work.

Another troubling facet of the jobs report is the substantial increase in the average duration of unemployment. The percent of job seekers classified as long-term unemployed (out of work for at least 27 weeks) has ballooned to 44 percent. During the 2001 recession it hit 11 percent.

These trends were clearly exacerbated by the severe recession and reinforced by the housing collapse, as homeowners who are underwater on their mortgage cannot easily relocate to find work. Nevertheless, the structural shift was well under way prior to the recession and would have become acute in any event.

No amount of temporary stimulus can address this fundamental imbalance.

Many workers possess skills that are becoming obsolete, while employers are seeking capabilities workers do not have. Too many construction workers and too few engineers, for example.

The education system has been slow to recognize the deficit and tepid in response. Meanwhile, government programs have been largely ineffectual.

The 49 federal job training programs operate at a high cost per worker and yield minimal successes. Employers are generally willing to invest in retraining but are reticent to do so given the extant regulatory and political uncertainties and tax incentives to create jobs offshore.

The threat of higher structural unemployment has been obscured by the more observable cyclical job losses due to the financial crisis. As the cyclical component recedes, policymakers will be forced to confront the structural problem in more effective and economical ways.