The Threat Of Structural Unemployment

by: Neoclassical Economist

According to the U.S. Bureau of Labor Statistics, the unemployment rate in the US fell by 0.4 percentage point to 8.6 percent in November 2011, as the number of unemployed persons, at 13.3 million, was down by 594,000. Non farm payroll employment rose by 120,000. Employment continued to trend up in retail trade, leisure and hospitality, professional and business services, and healthcare, while government employment is still on a downward trend.

Below is a 10-year chart of the seasonally-adjusted unemployment rate:

(Click charts to expand)

While the unemployment rate has been slowly declining since its peak in late 2009, it is still somewhat unclear if we are facing unemployment that is cyclical or one that is structural. For this reason, economists have devised the so called Beveridge curve, named after British economist Henry Beveridge. As shown below, the curve shows the relationship between unemployment and the job vacancy rate and should be downward sloping.

It is interesting that at the end of 2009, the curve shifted slightly as each month’s point moved up and to the left. The job openings rate increased and the unemployment rate increased at first and then started decreasing.

The number of job vacancies has risen by 35 percent since the trough in June 2009 – but the unemployment rate has decreased by 9.4% since the same time and remains relatively high. This is what’s worrying the proponents of structural unemployment. If there are plenty of vacancies out there but people are not filling them, it must be because their skills are insufficient.

But a recent publication (pdf) by the San Francisco Federal Reserve Bank finds that vacancies are high relative to hiring across a broad range of industries, including those such as construction. The authors state that

the lackluster labor market recovery can be traced in large part to weakness in aggregate demand; only a small part seems attributable to increases in labor market frictions. This continued labor market weakness has led to the highest level of long-term unemployment in the U.S. in the postwar period, and a blurring of the distinction between unemployment and non participation.

Non participation here means that companies may not be trying very hard to fill jobs, while workers in receipt of unemployment insurance may not be trying very hard to find them.

Overall, the Fed publication finds that skill mismatch likely has contributed only about 1 percentage point to the increase in the unemployment rate, with the range of estimates varying from about 0.25 to 1.75 percentage points. In addition, the effect of the mismatch is expected to essentially disappear as the economic recovery continues.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.