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Is structural unemployment on the rise?

structured unemployment photosBehind the concern about the sluggishness of the U.S. jobs recovery lies a debate about how much of the lag may be due to "structural unemployment." This type of unemployment stems from longer-term changes in the structure of the economy, not from a temporary decline in demand for workers. Examples of structural change include a shift in the economy toward jobs requiring higher levels of education or a permanent decline in demand for a particular industry's product.

Some observers argue that the persistently high unemployment rate can be accounted for by "a shortfall in demand, rather than structural changes in the composition of our output or a mismatch between worker skills and jobs," as Christina Romer, former chair of the White House Council of Economic Advisers, noted in a Sept. 1 speech to the National Press Club.

Some suggest that unemployment is always slower to recover after a recession caused by a crisis in the financial system because such a crisis often undermines the confidence of both lenders and borrowers, virtually guaranteeing a period of slower job creation until confidence returns.

Still others suggest that fundamental changes in the economy, including migration of manufacturing overseas and major advances in automation, are combining to push unemployment higher on a longer-term basis.

The debate is important because, if a significant portion of current joblessness stems from structural issues, then traditional stimulus measures may not have as much success in creating new jobs as in the past.

Chart 1 shows that "underemployment" (people who are working less than they would like to) is significantly higher than in past recessions. Such data have fueled the debate about whether there is something different about the current episode.

Chart 1

Possible factors
Skill shortages
Indeed, some employers are reporting difficulty in finding workers with the necessary skills. Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, recently said "firms have jobs, but can't find appropriate workers." In the past 18 months, the number of job openings has climbed even as unemployment has remained high. The job opening rate has increased from 1.8 percent last August to 2.2 percent in August 2010.

It takes time for workers in shrinking industries (such as manufacturing, construction, and finance) to retrain themselves and acquire the skills and knowledge needed to enter expanding industries like health care or technology.

Economists use the Beveridge curve (named after British economist William Beveridge) to study the relationship between job openings (vacancies) and unemployment (see chart 2). The Beveridge curve shows how efficient labor markets are in terms of matching unemployed workers to job openings. As Atlanta Fed Research Director David Altig discusses in his Aug. 18 macroblog, although the job opening rate has increased significantly recently, the unemployment rate has not improved much. This trend suggests that labor markets are having trouble matching workers to job openings.

Chart 2

The jury is still out on the current episode. Altig cites work by the Cleveland Fed's Murat Tasci and John Lindner that indicates that "the dynamics we have seen recently are not an exception, but are common during the recovery phase of business cycles. As the economy starts improving, it takes time to deplete unemployment, even though job openings are relatively quick to adjust."

Lack of mobility
A second factor that could be described as a structural problem is the reduced level of mobility in the American workforce because of the housing slump. Historically, one of America's greatest advantages has been workers' ability to pull up stakes and move to another part of the country where jobs might be more plentiful or more suited to workers' skills and experience. For example, unemployment in North Dakota in June was about 3.6 percent while in Nevada it was 14.2 percent. Such a gap is historically unusual because people typically have moved toward states with low unemployment.

But with existing home sales nationally down 25 percent from a year ago (see chart 3), many people are unable to sell their homes and move to an area where more jobs are available. In addition, the prevalence of two-income households makes it much harder for many families to relocate than it was in the days of single-earner families.

Chart 3

Extended unemployment benefits
Some observers also have suggested that the temporary increase in unemployment benefits to 99 weeks (up from the previous maximum of 26 weeks) could account for the persistently high unemployment rate. But a study by the San Francisco Fed found that those eligible for extended benefits were unemployed for 1.6 weeks longer than those who could not claim support. This effect is equivalent to a rise of just 0.4 percentage points in the unemployment rate. (Other studies suggest the effect may be somewhat larger. In fact, an unpublished update to this study shows that those with extended benefits were unemployed 3.5 weeks longer, equivalent to a 0.8 percentage point rise in the unemployment rate.)

How much unemployment might be structural?
If the extended unemployment benefits are not a major factor, is it possible to estimate the magnitude of the effects of skill shortages and lack of mobility? The Economist ("Bad circulation," Aug. 26, 2010) cites a recent report by the International Monetary Fund that compared the skill levels of the unemployed with indicators of the skills required by employers to create state-level indices of mismatches. It used local mortgage-default and foreclosure figures to estimate geographical immobility. The study's results suggest that skill mismatches and lack of mobility act to magnify the impact of each other. Because of these rigidities, the Economist notes, "the authors conclude that…the unemployment rate consistent with stable inflation—roughly speaking, the 'structural unemployment' rate—rose from around 5% in 2007 to between 6% and 6.75% by 2009." The IMF's method is only one way of estimating an elusive and evolving figure.

With the civilian labor force in August at 155 million, the difference between an unemployment rate of 5.0 percent and one of 6.75 percent is about 2.7 million jobs, enough to have significant effects on everything from health care to government budgets to election results.

History shows that it has usually been a mistake to underestimate the American economy's resilience. New technologies, new inventions, and new industries have created massive numbers of new jobs. Huge numbers of workers are in the process of retraining themselves. This time, however, jobs in many emerging industries will likely require significantly higher levels of education or training. And many American companies face overseas competitors who have the advantage of lower cost labor.

There is no quick fix if structural unemployment is indeed higher than in the previous recession. Better education, more targeted job training programs, increased business confidence, and an improved housing market can all play a role in addressing the issue, and they will all take time to make a difference.

By Gary Tapp, economic education director, Public Affairs. He thanks Atlanta Fed economist Lei Fang for helpful comments.


October 15, 2010