Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Structural Unemployment Is Here to Stay

Whenever we go out to eat with my father-in-law’s family, we split the bill in half. Over the last 10 years, one in five times the waitperson has no idea how to divide the bill by two. After experiencing this problem more than 10 years ago, we have studiously kept track of how often a waitperson could not divide by two.

To compete in the global economy you either have to be able to be one of the lowest cost producers, implying a low wage, or you need to have the wherewithal to create high quality goods and services. High quality services and goods require people with the education and skills to perform tasks that are complicated. Without the necessary skills, people are relegated to low paying jobs, if they can get them. Many others are out of work for long periods.

The Many Faces of Unemployment
You may not know it, but there are many categories of unemployment. And although they all look the same on the outside, their impacts on the economy can be very different. What we're currently dealing with is called "structural unemployment."

Structural unemployment occurs when there are insufficient numbers of skilled people for the available jobs, yet there is a high number of unemployed or underemployed people because they lack the skills and education needed to fill the available jobs.

British economist William Beveridge developed a chart that shows the relationship of unemployment and job vacancies. Known as the Beveridge Curve, it visually represents the supply of and demand for workers.

Since the second quarter of 2009, the number of unemployed has remained high even as job openings have risen. This phenomenon goes against prior experience and what one might expect. The chart below is from the Federal Reserve Bank of Atlanta (“A curious unemployment picture gets more curious” by Dave Altig).

Beveridge Curve 2000-2010
 
Using data from 2000-2008, the dashed line attempts to give an estimate of the relationship of job openings and those unemployed. As we can see this relationship is not even close to acting as predicted. What might be the underlying cause for the apparent structural unemployment problem? It all has to do with education.

The Bleak Future
It looks like people lacking necessary basic skills and education may have a bleak future to look forward to. Employers look for people with sufficient education and the necessary skills to meet their needs, and not being able to divide a number by two limits employment potential.

The education and skill level of the population in the United States is falling behind other countries. According to the National Center for Education Statistics, 74.9% of students who were freshmen in the fall of 2004 graduated from high school on time in 2008. That means 25% of the incoming work force does not have a high school education.

A decade ago, the U.S. led the world in college graduation rates. But other countries are moving ahead in graduation rates, helping them to achieve a better economic life. Currently, the U.S. ranks behind 11 other countries in the number of workers with associate degrees or higher.

As long as the U.S. lags behind in education, the unemployment rate will remain high. Moreover, structural unemployment will slow economic growth, as companies are unable to hire the necessary skilled workers they need. They might be forced to look overseas, taking jobs away from Americans.

In order for U.S. companies to compete effectively, they must become the most productive in the world. To achieve these levels of productivity workers need to possess the necessary education and skills companies require.
Productivity improvements by American business have continued at unprecedented rates. Better and more efficient business processes raise the throughput of the American worker. With each improvement, workers apply more advanced skills while working independently.

According to a June USA Today article: "Automakers need workers with more and different skills than in the past on the factory floor.… Among priorities: computer skills and the ability to work with less supervision than their predecessors." That likely means education beyond high school.

The productivity improvements that will help the U.S. achieve its growth require an upgrade in the skills and education levels of its workers. Competence with arithmetic and analytical skills, along with a comfort level with computers, are basic.

Workers who don't posses the necessary skills may find it difficult to nag a job with a future. Constant unemployment and struggling to get by will be their future. With 25% of the population without the necessary education to get a good job, it is no wonder unemployment is predicted to remain high.

The Bottom Line
What does this mean for the rest of us? Just because we're headed in the direction of sustained structural unemployment doesn't mean we're shackled to it. There are many steps we can take to change the country's direction. The first of which is ensuring our kids receive a good education and graduate from college and maybe even consider graduate school. It does make a difference.

Second, we need to do more to make a difference in the education system. There are good organizations that are achieving successfully improving graduation rates from high school and college. In 2009, Everett School District (outside of Seattle) pushed the number of freshmen who graduated on time from 53.1% in 2003 to 83.7%. And a report from the Coalition for Community Schools showed eight community schools experienced rising graduation and college acceptance rates and a reduction in dropout rates. The schools come from the Bronx, Chicago, Cincinnati, Indianapolis, Philadelphia, Portland and Tukwila, WA.

Third, recognize the United States will have a long-term structural unemployment problem that will limit the growth of the country’s GDP. Investors will need to adapt to a slower growth economy. Companies will compete for the skilled workers in short supply with higher salaries and benefits. Watch for personnel expenses to rise for companies that require higher skilled workers.

If we don't do anything, the potential outcome could be disastrous. A slower growing economy is unable to generate higher tax revenues to help offset deficit spending. Politicians face the prospect of trying to balance the budget by lowering spending and/or raising taxes even as the economy fails to achieve full employment growth mode. Should the deficits continue, the cost to pay back the debt will become overwhelming. The potential for higher interest rates to justify the higher risk of the debt will cost the government and the economy. Debates will rage over what short-term solution the country should implement. Yet the core problem -- low quality education -- will remain an after-thought. Many will say it takes too long to see any impact. The longer we delay, the longer it will be before the problem is solved.

America needs to return to being a leader in education before it can overcome the structural unemployment problem that hangs around the neck of the country like an anvil.

For a theoretical understanding of how employment behaves, read our educational piece The Economics of Unemployment.