No simple solution to unemployment

Vijay K.Mathur

Published in Standard-Examiner,Tuesday, June 15, 2010, Ogden, Utah

It is understandable that most Americans are worried about the unemployment rate, and they want the Obama administration to do something about it. However, government is limited in its capabilities to generate employment directly unless it creates public employment. Government can only attempt to stimulate the economy's growth temporarily using fiscal and monetary policy, so that the private sector feels confident enough about the future demand for their products to hire more people. Even if the markets for goods and services grow, employers are reluctant to add to the payroll if there is demand uncertainty and/or lack of financial capital.

Most people cannot understand why the unemployment rate still remains high even though financial markets are doing better, stock market is strengthening, profits are up, and the economy is growing. In 2010 unemployment rate was 9.9 percent in April, up from 9.7 percent in March. If we add discouraged workers who dropped out of the labor force, April's unemployment rate would be 10.4 percent.

At any given time there is always some unemployment because people always voluntarily quit jobs to find better jobs. For example, in the past three months in 2010, the quit rate was higher than the layoff rate. Also, there are unemployed people whose skills are outmoded and hence are not needed in the labor market. Hence, even in a robustly growing economy we will have that economists call natural rate of unemployment (NRU); it is also called full employment unemployment rate without inflation and is estimated around 5 percent to 5.5 percent.

Since the number of unemployed is equal to the difference between non-institutional civilian labor force 16 years old and over, and the number of employed, the data in 2010 shows that from March to April 2010, even though employment increased by 550,000 unemployment grew by 255,000 due to the increase in labor force by 805,000. For unemployment to shrink, employment must rise faster than the increase in the labor force.

The difference between this recession and past recessions before 1990 is that output growth and productivity growth (output per labor hour) were not followed by quicker response in job gains. In fact, job layoffs continued despite the positive output and productivity growth in the economy.

Economist Robert Gordon argues in a recent article that "the rise of immigration, imports, medical care costs, together with the decline in minimum wage and labor union power, have contributed both to a rise of inequality and an increasing tendency of firms to treat workers as disposable commodities." In addition he argues that information technology, which has increased flexibility in the labor market, has enabled businesses to increase productivity during recoveries and reduce labor cost.

There are other factors that affect unemployment rate where government role is limited. Skill requirements have changed due to changes in industrial and occupational composition. Manufacturing has declined and service sectors like health, education, information, financial services, business and professional services have gained in importance. For example, the unemployment rate for men in 2009 in manufacturing was 11.8 percent, while it was only 5.5 percent in education and health services.

High teenage unemployment rate (ages 16 to 19) increases the average unemployment rate. It is historically more than double the rate for ages 25 to 44. An increase in average duration of unemployment, which varies across occupations and demographic groups like age, gender and race, also contributes to higher unemployment rate. For example, in April 2009 median unemployment duration varied between 11.6 to 18.4 weeks across occupations and was 14.2 weeks for whites and 19.7 weeks for blacks.

In the absence of public employment in a market based economy, the government's role in a recession is twofold. First, it should provide initial boost to the economy through fiscal and monetary policy when the private sector is hesitant to take risk in expansion plans. Second, it should work on removing policy uncertainties, domestic and international, associated with trade, taxes and regulations. Beyond the short run intervention, it is the private sector which has to respond and hire people. Recently released data from the Bureau of Labor Statistics give us some hope because from April 2009 to April 2010, the hiring rate increased by 4 percent, while the rate of layoff and discharges fell 35 percent in the private sector.

Assuming that the labor force stays at 154 million as it was in April 2010, the economy has to generate close to 7 million jobs to bring us back to the NRU of 5.5 percent. However, policy making is difficult because the estimates of NRU are imprecise. And even if the estimates are close to reality, the role of government is limited especially when it is facing large debt load. In the long run, government may implement policies to improve the educational and skill mix of the labor force to suit occupational changes and remove policy uncertainties nationally and internationally. For a sustained improvement in unemployment, businesses and labor themselves have to take the initiative to bring down the unemployment rate.

Mathur is former chair of the economics department and is now professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He resides in Ogden.