Simple Ways to Attack Unemployment

06/24/2011 9:00 am EST


Jim Jubak

Founder and Editor,

Even as the economy recovers, joblessness has barely budged. Solutions are out there, and waiting will only put the US at a disadvantage in the global economy.

At his press conference after Wednesday's meeting of the Federal Reserve’s Open Market Committee, Fed Chairman Ben Bernanke said that employment is picking up—at a frustratingly slow pace.

I think that’s dead wrong, and not just because the official unemployment rate climbed to 9.1% in May (from 9.0% in April and 8.8% in March).

The numbers now show that the jobs problem in the US isn’t simply cyclical unemployment—the kind that rises and falls with the cycles of the economy—but also a rise in structural unemployment—the kind that doesn’t go down very much even when the economy picks up.

The kind of patience that Bernanke advocates is absolutely the wrong medicine for an increase in structural unemployment.

Right now the numbers are starting to show a troubling and startling divergence: The number of job openings is rising, but the number of people working isn’t climbing nearly as fast.

It looks increasingly like one "gift" from the Great Recession is a rise in the permanent unemployment rate, even in a good economy. That will mean more people out of work for the long term, with all the pain that imposes on those workers and their families.

And it will mean that the US economy as a whole will grow more slowly than in the past—and than it might have without the damage inflicted by the Great Recession.

Remember 4.6% Unemployment?
You know all about cyclical unemployment by now. The official unemployment rate—which doesn’t include discouraged workers who have stopped looking for work, or workers with part-time jobs who would like full-time employment—stood at 9.1% in May 2011.

Way back in 2007, before the global financial crisis and the Great Recession, the official unemployment rate was 4.6%. In 2008, as the recession started to bite, it climbed to 5.8% and then, in 2009, it rocketed to 9.3%.

The unemployment rate follows, with some lag, the economic cycle. In 2007, the economy grew at an annual 3.2%, 2.3%, and 2.9% rate in the second, third, and fourth quarters, respectively.

In 2008, the annual growth rate dropped to a negative 0.7% in the first quarter, rebounded to a not-terribly-robust (but at least positive) 0.6% in the second quarter, and then fell off a cliff in the third quarter, dropping at an annual rate of 4% before finishing the year at a negative 6.8%. The next year started grimly, with the economy shrinking at a 4.9% annual rate.

But the unemployment rate hasn’t dropped very much as the recovery from the Great Recession has progressed.

The post-recession unemployment rate did dip briefly to 8.8%, from a high above 10%, but now it seems stubbornly stuck above 9%. That’s after a 5% annual growth rate in GDP in the fourth quarter of 2009 and growth rates of 3.1% and 3.7% in the first and fourth quarters of 2010.

NEXT: Why Hasn’t Unemployment Shrunk?


Why Hasn’t Unemployment Shrunk?
That has been a big puzzle to economists. The explanations are all over the political and economic map:

  • The 2009 economic stimulus package was too small.
  • Or too big.
  • Businesses are reluctant to hire because of inconsistent or intrusive regulation.
  • The continuing decline in housing prices has sapped consumer confidence and spending.
  • Rising income inequality has put a huge burden on the middle class.

And on and on.

What most of these explanations share, however, is a belief that unemployment would shrink as the economic cycle shifted from recession to growth—except that something has happened this time to interfere.

A very few voices have worried that maybe the slow recovery in job growth from the Great Recession is a sign of structural problems. And that’s looking more and more likely.

For instance, in the manufacturing sector—which has led the economy during the recovery—the number of jobs has declined since January 2009, but the number of available job openings has climbed to 230,000 from 98,000.

Manpower, the employment company, reports that 52% of leading US companies report difficulties in hiring essential staff. In 2010, Manpower’s survey showed 14% of companies reporting difficulties.

McKinsey Global Institute found in a survey of 2,000 companies that 40% had positions open for at least six months, because they couldn’t find suitable candidates.

That data too anecdotal for you? Sorry, but there aren’t any good comprehensive statistics on how many companies should be hiring but aren’t. It’s too subjective. How many of the companies in McKinsey’s survey, for example, are using the “no suitable candidate” explanation as an excuse to avoid hiring?

But there are estimates. Harry Holzer, an economist and public policy professor at Georgetown University, estimates that the unemployment rate would be 8% instead of 9.1% if existing job openings could be filled. The International Monetary Fund estimates that 25% of US unemployment is structural.

If those estimates are anywhere near right, then most of US unemployment is still cyclical. And it should be attacked with the available tools for creating demand in the economy.

You know what those tools are, since we’ve tried most of them—not always in the best or most efficient fashion, I’ll grant you.

The Federal Reserve has tried to create demand (even for houses) by keeping interest rates low. Congress and the president have tried to create demand by spending on infrastructure (too little, I’d argue), tax cuts, and investment tax credits to business, to mention a few approaches.

It’s quite possible that these measures haven’t worked because the Great Recession was the deepest economic downturn in the US since the Great Depression, and that cyclical downturns, when they’re deep enough, are very difficult to reverse. Certainly the duration of the Great Depression suggests that.

But it’s also possible that these cyclical measures have been ineffective because they’ve attacked only part of the unemployment problem. If companies can't find workers with the right skills, then creating demand won't reduce unemployment very quickly.

Think of this mismatch of workers’ skills and job openings as yet another force slowing down job creation.

If a company has to train new hires to bring their skills up to speed, it has to be 100% convinced that the state of the economy makes the expenditure worthwhile. No company is going to spend six months training a worker only to discover that the orders it was counting on haven’t come in the door.

NEXT: How to Speed Up Job Creation


How to Speed Up Job Creation
There are ways to attack this structural unemployment problem. The federal and state governments could pay for worker training through an expansion of community college systems, grants to workers (unemployed or employed) for training, or subsidies to company- or industry-run apprenticeship programs like those in Germany.

Some of the existing programs in these areas—community college funding, for example—have been hit hard by state and local budget cuts. And there’s certainly a spirit in the land (I’ve always wanted to use that phrase) that says we can’t afford such frills.

Except that these aren’t frills. And they wouldn’t be, even if the United States wasn’t trying to figure out a way to speed up job creation after the Great Recession.

If you look around the world—and take a point of view that stretches beyond the Great Recession—you’ll see that the great economic challenge of the next decades is competing on productivity and the skills of an economy’s workforce.

I don’t think you can escape that competition even if you’re China—rising wages and incomes in that society are pushing the cheap-labor jobs to countries such as Indonesia, Bangladesh, and Vietnam. Moving up the value chain is the next game every economy will have to play.

And the United States doesn’t seem to be half-trying.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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