Has Structural Unemployment Become Important in the United States? Becker

The persistently high unemployment rate in the United States during the Great Recession has led to claims that much of American unemployment is “structural”. According to this view, the demand for workers by companies is insufficient to employ all unemployed workers because there is a mismatch between the skills possessed by many American workers and the skills required by companies. The structural advocates believe the skills demanded by companies tend to exceed or otherwise be different from the skills possessed by many unemployed workers. As a result, so goes the argument, these unemployed workers cannot find jobs and remain unemployed for a long time.

 

Although I will argue that not much of American unemployment is “structural” or due to such a mismatch, the structural theory is on the surface supported by the large number of long-term unemployed, the most disturbing feature of American unemployment during the Great Recession. Structural advocates claim that unemployed individuals with skills that are only weakly demanded face prospects of remaining unemployed for a long time. Since the unemployment rate rose above 9% in 2009, the fraction of the unemployed who have been out of work for over 6 months has grown to over 40%. Prior to the start of the recession in 2008, long-term unemployed were a little under 20% of total unemployment. Although long-term unemployment usually rises during prolonged recessions, the magnitude of the rise during the current recession is unusual for the United States.

 

While long-term unemployment in the American labor market jumped up during this recession to unusual heights, there is no evidence of any large mismatch in US labor markets prior to the recession. In 2007, for example, the total unemployment rate was still under 5%, and less than 20% of the unemployed were out of work for six months or more. It is not credible to believe that the underlying structure of labor demand in the US has shifted so much in the few years since the recession began that almost 4% of workers (0.4x9%) will not have employable skills once the American economy gets out of its doldrums, and begins to grow at its “normal” long-term rate of about 2% per capita per year.

 

The JOLTS monthly data prepared by the federal government on new hires and job vacancies in the United States show over 3 million job vacancies in recent months, and over 2 million openings even during months at the height of the recession. Given this large number of job openings, I conclude that the millions of individuals who have been out of work for 6 months or more could find jobs if they are willing to be flexible on wages and other conditions of employment. Put a little differently, millions of job openings each month in a labor market with considerable flexibility in wages, which describes the American labor market, makes it really hard to argue that many of the long-term unemployed cannot find jobs.

 

How then can we explain the high and persistent levels of long-term unemployment during this recession? One clearly important factor is the extension in July of 2010 of unemployment insurance to cover workers who have been out of work for 99 weeks instead of having their payments end after 6 months of unemployment. Studies have shown that many unemployed find jobs just about when their unemployment payments expire, after 6 months of collecting benefits under the old system. It does not require any complicated economic analysis to conclude that the extension of unemployment payments to 99 weeks will encourage many individuals to remain unemployed after 6 months of unemployment, although they would have found jobs under the old rules. They will turn down jobs that may not be as good as those they had before becoming unemployed in order to continue to collect unemployment benefits. For that reason I opposed the extension to 99 weeks in my post on 7/25/2010 (“Should Unemployment Compensation be Extended?”).

 

Long-term unemployment may also partly be the result of uneven employment opportunities and uneven prospects for housing prices in different states and regions of the US. States like California, Nevada, and Florida that had major construction, jobs, and housing booms in the years before the onset of the recession suffered the largest hits to employment and to housing prices. Unemployed workers in such states may be reluctant to move to states where more jobs are available at good wages since they may be involved in foreclosure litigation and other issues related to the depressed housing market. They may also turn down jobs that pay much less then the unusually good wages they had during the boom times to continue to collect unemployment benefits for up to 2 years.

 

Other factors are also involved in the sharp rise in the number of workers unemployed for over 6 months.  Yet overall they do not justify the conclusion that many unemployed individuals are unable to find jobs because the American economy has too little demand for their set of skills.

Comments

[Back Taxes]

Three to five years? If you believe that you need that much money to cover expenses to get your business going then your business simply isnt a great one to start to begin with. Second, no one that starts a business goes to a bank for funding, it just doesn't work like that. Have you ever started a business or are you just assuming you know what your talking about?

[NEH]

Better pay them, Really, and who do you use as a financial advisor and investor? Ma and Pa Kettle, fly by night private equity or the neighborhood loan shark. As for business/industrial startups - yes...

[Jack]

Barbara? Or Back taxes? I'm clearly fishing for your ideas and wisdom as to what businesses you would invest in had you lost your job, been on unemployment for a while and it didn't look good for another job for quite some time. Have any?

[Jack]

NEH? Geez the company as TEAM concept of adding value? Isn't that from the era when Volvo built its reliable cars and company on a basis of the top guy earning no more than ten times that of the least paid?

You are WAY behind the curve! Today ya gotta ante up and pay some genius leader 400 times or more what the working folk earn and pound down their salaries to be competitive. Surely by now you're learned that the receptionist, that first voice one hears on calling a company and routing calls to sales or engineering and billing is just overhead that adds no discernible value worthy of a living wage and can be replaced by a temp provider with just one phone call?

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Great article, I think you covered everything there.

[NEH]

Jack, As for being out of touch... I love the new "automated phone attendants" that bounce you out to Never Never Land or, if and when, you do get to the proper extension, you end up having to leave a voice mail that never gets returned.

Raises questions in my mind as to who is minding the store? Or is the operation running on Autopilot and the organization just an empty shell? ;)

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[Jack]

NEH, Yep........ that front line "receptionist" ought to be one of the best trained sales people in the organization with an ear well tuned to hear a "buy" signal and properly deal with and route a customer complaint. But..... such is rare.

[Jack]

Ha! while topics such as structural unemployment lasting years ought to be front burner in Congress, we're instead treated to a days long pony show of fantasy fare "Balanced Budget Amendment" which would make even worse the problem of being ruled by an even smaller minority.

Then there is the laughable idea of a Congress "wielding" a 14% approval rating having the leadership to push through even a worthy Amendment to our Constitution.

A wasteful exercise for attempting to fool the gullible with "recorded votes" in contested election districts not already, favorably gerrymandered.

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[NEH]

Jack, "Balanced Budget Constitutional Amendment"? Sounds like another exercise in fanatasy or "stupidity". Anyone remember the Volstead Act, the Eighteenth Amendment and the Twentyfirst Amendment? Sounds more like a make work project for Congress. ;)

I certainly wish the various Politicos would learn that Statutory elements do not belong in Constitutions. Maybe that's why we're having the Budgetary Crisis in the first place. Simple ignorance. In order to balance any budget, the fundamental rule applies:

Revenue must be greater than or equal to expenditures.

Perhaps the real problem is not expenditures, but lack of revenue and revenue equals Taxes, Tariffs, Customs, Duties and the like.

[Jack]

NEH --- Agreed, but

"Revenue must be greater than or equal to expenditures."

...... I don't even think balanced is the right goal. As the US doesn't bond even its hard assets..... bridges etc. I'd expect us to carry reasonable debt as does most families, companies and corporations. To some extent investing or even consuming now at later expense is not a mortal sin. At low bond rates a national debt of half of GDP would not be worth arguing about.

Clinton and Congress might have erred in running (theoretical) surpluses that constrained the economy too much and gave an open invitation to a campaign centering on slopping the hogs.

Gore certainly screwed up -- instead of his "lock boxes" and convoluted tax breaks for the guy down the street, if any who would slip through the criteria, should have put forth a sizable, simple tax cut targeting lower and middle incomes. (Tough though as at the lower incomes they make so little there is not tax burden to relieve)

The winning campaign would have been "Hi I'm boring Al still wearing black suits with no make-up, how would you like four more years of Clinton era prosperity w/o the drama, AND a middle class tax cut?) Good enough for a lukewarm "OK Al" in Florida and a win.

At this point it's surely some of both revs and cutting. Some revs should have been increased long ago, for example the 23 cent gas tax that hasn't been raised in decades. Another 23 cents would flesh out the budgets for highways et al. and had it been done a while back, my guess is it would cost nothing today for having a restraining effect on consumption and (assuming a working market???) price. Today, I suppose even that small change would have to be phased in at a nickel a year..... or Ha! given US beliefs in being entitled to cheap oil and wasteful cars, even that might be political suicide.

[neoclassical_libertarian]

The minimum wage was increased during the middle of the recession. The parasitic trade unions have gotten stronger under Obummer. The Federal Register had 90,000 regulations in 2010, an unprecedented level. The Unaffordable Care Act is expected to place increased burdens on smaller firms. Unemployment insurance, like Gary Becker and Thomas Sargent, this year's Nobel laureate, have pointed out, has been increased substantially. And the Democratic clowns in Washington want to increase taxes on capital gains, dividends, and marginal incomes in 2012. With this war on free market capitalism, no wonder the current dismal unemployment is structural. We have a thwarted market system, which is functioning like Joseph Stiglitz's brain: which is not at all.

[Jerry]

@NEH
A person always stands a better chance of getting a job if they have updated search skills. A resume is not enough and waiting for the economy to get better is not an option. The Relationship Capital Co. is not a "head hunter resume collector." It truly is offering free job search and networking training. Check it out: http://RelationshipCapital.CO/JobNetworkingPrimer/?utm_source=bl&utm_medium=sm&utm_content=d

[crusher]

I graduated in 2009 with a major in Finance & Applied Economics, not exactly the same as someone who graduated with a degree in Art History. It still took me an entire year to find any employment at all! I was applying for any job I saw open that I might qualify for including jobs such as: Walmart greeter, night time hotel clerk, security guard, etc.

I now work as an entry level accountant, but; I'm paid a fraction of what my employer paid the previous person in this position, and I've had to take a 10% pay cut in the past year on top of that. I make just enough money each month to pay my bills. http://www.millexpo.com/

[Roxanne]

I'd be interested in seeing the data broken down to be able to see the percentage of unemployed who are highly educated - college degrees and more. I get the impression that even if such seemingly highly skilled workers were willing to take lesser paying jobs, employers wouldn't hire them for fear they would simply leave the job too soon after starting. Hiring and training new staff are expensive activities and perhaps employers are the ones not willing to take workers who could likely do the job (and even at a lower pay than they are accustomed) simply because they are overqualified.

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Having higher numbers of occupants per existing structure doesn't bode well for selling off the homes having fallen or about to fall into the laps of bankers.All of the sci-fi stories pointed to a shorter work week, more leisure time and industries developing around increased leisure time coupled with the income to enjoy it. We have nothing like that in place or even in mind. Instead those desperate for any kind of job are to work longer hours for less pay and be appreciative for their opportunity.

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[Bob]

Becker cites studies showing longer benefits cause longer unemployment. I'm not sure what this means. What's the median vs average? Will we be punishing a broad distribution of people for the actions of a few?

And we haven't resolved the 'moral hazard' problem of Wall Street (in fact, conservatives are actively fighting against efforts to resolve moral hazard.) In this political environment, and given the statistical nature of the unemployment issue, it makes little sense to balance the unemployment problem on the backs of the unemployed.

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All of the sci-fi stories pointed to a shorter work week, more leisure time and industries developing around increased leisure time coupled with the income to enjoy it.