Where are we Relative to Full Employment?

What's Really Ailing Employment: Lack of Demand

Posted 11:00 AM 02/04/11,,

These may be the two most important economic policy questions of our time: What's causing America's high unemployment rate, and what can be done to lower it?
One camp, which includes many supporters of supply-side economics, argues that the problem is largely "structural": Too many Americans don't have the right skills or training, or are living in regions of the country that aren't creating enough jobs.
From this perspective, the solution to lowering the nation's unemployment rate --now 9% with the January report just out-- is fairly straightforward: Americans should retrain, or where additional training isn't required, simply change careers to fields that need workers. And unemployed Americans in job-poor areas should consider moving to where employers are hiring.
It seems like a plausible analysis, with a rational solution. Unfortunately, the evidence doesn't support it.
Is There a Skills Mismatch?
What the evidence does show is that America's high unemployment rate isn't structural but due to a lack of demand.
To be sure, some sectors now have a surplus of skilled workers, many of whom probably won't be employed again in their old fields. For example, many unemployed construction workers -- hit hard by the busted housing bubble -- will probably have to change careers. Two other categories that are likely to need fewer employees in the future: real estate agents and mortgage loan officers.
But that doesn't make America's unemployment problem structural. If it were, we would see high unemployment in only a few sectors, and the problem could be solved by the jobless changing tracks and finding work in other fields.
The reality is, however, that there's a job shortage in almost every sector. And whilethe labor market is slowly healing and should continue doing soas long as the recovery remains intact, job growth is still too tepid -- especially for the millions of Americans trying so hard to find work.
The Economic Policy Institute (EPI), a liberal Washington, D.C., think tank, has analyzed Bureau of Labor Statistics data and found thatjob cutting was "pervasive" during the Great Recession: Almost every sector did it. The institute also found that:
  • During the first 12 months of the current recovery, there were 32 million job openings, more than 10 million fewer than the first 12 months of the 2001-2002 recovery -- itself deemed a "jobless" recovery.
  • As of September 2010, there were between five and six unemployed workers for every job opening since mid-2009, "clearly suggesting a shortage of jobs," the EPI said. The job-seeker ratio is roughly double what it was following the last recession.
  • Since the recovery began, hiring has exceeded openings in the private sector by a larger ratio than it did during the 2007-2009 recession or during the last recession, which refutes the notion that companies are having more difficulty filling jobs, the EPI said.
"There has been little evidence to support the claim of extensive structural unemployment and. . .the pattern of employer behavior regarding job openings, layoffs and hires does not support such a claim,"the EPI wrote.
A $1 Trillion Output Gap
So if the problem of high unemployment isn't a lack of skilled workers in the right sectors, what's causing it?
If you guessed a lack a jobs overall, you're correct. The recession's 8 million-plus layoffs mean not enough jobs are available for all Americans who want full-time work. And all that job-cutting has contributed to a significant output gap -- the difference between actual U.S. GDP and its potential growth rate if the nation were running at what economists consider "full employment."
As the EPI report explained: "The economy is operating far below its potential output because of a shortfall in demand caused by an extreme loss of financial and housing wealth, and the reduced consumption that resulted."
A chart in MarketWatchcolumnist Rex Nutting'slatest article shows the huge extent of the output gap: The U.S. economy, as measured by GDP, is more than $1 trillion below its potential. The size of the U.S. economic pie has shrunk -- substantially reducing the number of jobs available.
American Business Is Already Competitive
Figuring out the true cause of today's high unemployment isn't just an academic exercise: Finding the answer will (one hopes) help guide public policy and private sector decisions.
Critics of the reasoning above will counter that what's needed are public policies designed to increase the competitiveness of U.S. businesses. Again, though, the evidence suggests otherwise: Overall, U.S. corporations are already very competitive and very lean.
Critics also argue that the country needs a lower corporate tax rate or tax code changes that increase investment and help businesses attract needed capital. The evidence to the contrary is overwhelming: U.S. corporations aren't short of capital -- they're sitting on$2 trillion in cash.
Policies Need to Spark Demand
Supply-siders further suggest that what's needed is a large cut in federal spending to reduce the government's role in the economy and make it more dynamic. Indeed, deficit reduction is necessary, in the long term. But cutting federal spending now will simply decrease demand further, pushing unemployment higher in what could become a vicious circle.
What's needed now is just the opposite: Increases in both public and private spending designed to increase demand. Because, as the EPI's analysis makes abundantly clear, America's high unemployment rate isn't due to a lack of skilled workers, but to a lack of jobs caused by a shortfall in demand.
The sooner policymakers and business leaders of all stripes accept that reality and implement policies that increase demand, the faster more jobs will be created, and the sooner America will return to healthy full-employment economy.