Ask the Experts: Unemployment

In this edition of Ask the experts, we’ve consulted two of the nation’s leading economists on the stubborn problem of American unemployment and what fixes we might attempt to lower the rate.

Need to Know on PBS interviewed Mercatus Center's Keith Hall and the Roosevelt Institute's Mike Konczal

This week the focus of our program is on unemployment and what having long-term unemployed workers means for our economy. April’s job numbers, released today, have many optimistic about a turn-around in our economy. 165,000 jobs were added this month and the unemployment rate dropped to 7.5 percent from 7.6 percent in March. The New York Times spoke with Steve Blitz, an economist with ITG, who is quoted saying, “It’s back to normal for this cycle, this number is back to the mainstream of what we’ve seen in this recovery.” However, Mr. Blitz also noted, “many of the new jobs were in lower-paying sectors like retail and food services.”

This surge of employment in low-skilled industries does not address the drought of American mid to high-skilled workers, who have not been able to fill vacancies in sectors such as manufacturing and high-tech. In this week’s program, Rick Karr introduced us to a program in Seattle by The National STEM Consortium, an alliance of ten community colleges in nine states, that works to (re)train workers for high-demand, mid-skill technical careers. The Consortium seeks to stem the tide of an increasingly chronicled inhibitor to the recovery: the skills gap. We spoke with experts on the issues surrounding American workers’ ‘skills mismatch’ back in February. In this edition of Ask the experts, we’ve consulted two of the nation’s leading economists on the stubborn problem of American unemployment and what fixes we might attempt to lower the rate.

How can we (or should we) incentivize or educate small businesses to train potential workers who may not have the precise skills businesses are looking for but who have been in the workforce before?

Keith Hall: The magnitude of the labor market challenge that we face is much too large to be primarily a worker skills problem. We are over 10 million jobs below the employment rate we had prior to the start of the recession. First and foremost we need a much stronger economic recovery. The best thing we can do to help is listen to small business concerns and reduce the huge economic policy uncertainty that exists for them. For example, the National Federation of Independent Business conducts a monthly survey of small business owners. When asked to list their single most important problem, “taxes” and “government regulations and red tape” have consistently ranked first and second – even ahead of “poor sales.” A distant seventh on the list of concerns is “quality of labor.”

One reason the magnitude of the employment problem is under-appreciated is that the unprecedented disengagement from the labor force has made the official unemployment rate a poor indicator of the recovery.  For example, the unemployment rate peaked in October of 2009 at 10.0 percent. That month, the employment rate (the share of the population with employment) was just 58.5 percent. Although the unemployment rate today is much lower (7.5 percent), we are still at a very low 58.6 percent employment rate. This has occurred because we’ve averaged 132,000 new jobs per month since then – only enough to keep up with our growing population; and that means nearly 100 percent of the unemployment rate drop was from a decline in labor force participation, not from job creation.

Unemployment among youth is a particularly difficult, systemic problem.  According to the Bureau of Labor Statistics, in July 2012 the youth unemployment rate was 17.1 %. Some have said job creation and apprenticeships are potential tools to curbing this issue. What do you think is the most prudent course to address this specific age group’s unemployment?

KH: The problem of high youth unemployment is not necessarily an indication of anything lacking in education or skills.  Basic job creation will help the most and increased use of apprenticeships to keep youth engaged in the labor market may contribute as well. In a sense, youth are taking a double-hit from this recession.

First, their unemployment rate rose more than it did for the rest of the labor force, and as a result they are over-represented in the number of long-term unemployed. When employers cut jobs, they do what they can to let attrition reduce employment levels and don’t generally layoff more than they need to. This leaves fewer open positions for new graduates.

Second, experienced workers have been much less likely to shift jobs as they normally would to advance in their careers.  Older workers have even delayed retirement as their wealth has taken a big hit from the recession. This may continue to severely impact younger workers for years. According to the Bureau of Labor Statistics, two-thirds of new jobs are replacement jobs. This means that even when younger workers find jobs, many will likely remain behind in their careers and suffer from years, or even decades of lower earnings growth as they have fewer opportunities for advancement.

Some argue that it is not simply structural unemployment that is preventing the unemployed from getting jobs because all types of workers are still unemployed. Is this a far assessment of the long-term unemployment problem?

KH: Yes it is. Economic data indicates that most of the current unemployment remains because of the very slow economic recovery. After the recession officially ended, the economy grew 2.4 percent in 2010. In 2011, growth slowed to 2 percent and in 2012 it slowed further to just 1.7 percent. Historically, economic growth of just 1.7 percent is consistent with only about 120,000 new jobs per month – well below the actual 183,000 monthly average we had last year. Productivity only grew 0.7 percent as businesses held on to workers despite weak sales. The labor market has actually been out-performing GDP growth.

Historically, long-term unemployment follows a predictable business-cycle pattern; rising months into a recession and remaining elevated well after a recession. The explanation for the latter is that we need above average economic growth to fuel much stronger job growth than we’ve experienced to see a significant reduction in the number of long-term unemployed. It may well be the case that we will have a rise in structural unemployment later on, but we won’t know that until we have a much more robust economic recovery. In any event, increased government spending on worker training is likely to have very little payoff when there is such modest job creation.

Konczal: I think this is an incredibly important thing to note. The economy remains weak for those who have jobs in addition to those without them. People with jobs aren’t quitting their jobs to find new ones. They also aren’t receiving raises, sometimes even for the cost of living. People who have only been unemployed for a short period of time still face a weaker job market. And if you look at the long-term unemployed, there’s nothing particularly distinct about them; there aren’t really any specific industries or occupations that are over-represented.

When unemployment hit 4 percent in 2000, a lot of the “problems” of the long-term unemployed turn out to be an illusion, and employers went out of their way to train people or otherwise bring them up to speed.

At this point, is there anything the Federal government can do or has not done so far to address the national unemployment numbers? Is the problem better served on the state level?

KH: While I certainly believe that lack of job creation is the most important economic problem we have, I think that the Federal government needs to focus first-and-foremost on setting the right conditions for private sector economic growth. There is a tremendous amount of economic policy uncertainty at the moment that is undoubtedly helping to hold back job growth. This needs to be resolved.

One thing the Federal government should not do is rush to intervene in labor markets. Training workers for jobs that don’t exist is a waste of taxpayer dollars and can serve to suppress market wages when there isn’t a labor shortage.  For example, the Recovery Act Green Jobs Program allocated $500 million to the Department of Labor to prepare workers for careers in energy efficiency. Even after a 2011 Inspector General report recommended that they re-evaluate the program “given the current demand for green job-related skills and the job market for green jobs,” the program continued on to an unsuccessful completion. Last year, another Inspector General report noted that less than 12,000 participants found and retained employment for longer than six months. This is a very poor payoff in a labor market where millions are unemployed.

MK: The biggest problem for the long-term unemployed is just a general lack of jobs, rather than them not meeting the specific needs of employers. At least for the near future, Congress and the Federal Reserve could do more on this front. Certainly, they can ascribe to a “do no harm” approach, and not cut the recovery off before it begins. Further, Congress could pull back on some of the austerity in place for 2013-2014, and the Federal Reserve could commit to a quicker recovery.