Closing America’s Jobs Deficit

BERKELEY – The latest data on employment in the United States confirm that the American economy continues to recover from the Great Recession of 2008-2009, despite the slowdown engulfing the other G-20 nations. Indeed, the pace of private-sector job growth has actually been much stronger during this recovery than during the recovery from the 2001 recession, and is comparable to the recovery from the 1990-1991 recession.

During the last 31 months, private-sector employment has increased by 5.2 million and the unemployment rate has now fallen below 8% for the first time in nearly four years. But the unemployment rate is still more than two percentage points above the long-run value that most economists view as normal when the economy is operating near its potential.

Moreover, the number of long-term unemployed (27 weeks or longer) is about 40% of the total – the lowest share since 2009, but still far higher than in the previous recessions since the Great Depression, and about double what it would be in a normal labor market. So the US labor market, while healing, is still far from where it should be.

That is partly because the job losses during the Great Recession were so large – twice as large as those of previous recessions since the Great Depression. In terms of US economic history, what is abnormal is not the pace of private-sector job growth since the 2008-2009 recession ended, but rather the length and depth of the recession itself.

The downturn was a distinctive balance-sheet recession that caused sizeable declines in household wealth and necessitated painful deleveraging. Consistent with recoveries from such recessions, demand has grown slowly, despite unprecedented fiscal and monetary stimulus, and that explains why the unemployment rate remains high. Indeed, businesses cite uncertainty about the strength of demand, not uncertainty about regulation or taxation, as the main factor holding back job creation.

Public-sector demand has also contracted, owing to state and local governments’ deteriorating budgets. As a result, public employment, which usually rises during recoveries, has been a major contributor to high unemployment during the last three years. Despite a modest uptick in the last three months, government employment is 569,000 below its June 2009 level – a 30-year low as a share of the adult civilian population. According to Hamilton Project calculations, if this share were at its 1980-2012 average of about 9.6% (it was actually higher between 2001 and 2007), there would be about 1.4 million more public-sector jobs and the unemployment rate would be around 6.9%.

Recent reports suggest that there are more than three million unfilled job openings, and about 49% of employers say that they have difficulty filling positions, especially in information technology, engineering, and skilled trades. This has fanned speculation that a “mismatch” between workers’ skills and employers’ needs is a significant factor behind the elevated unemployment rate.

But there is scant evidence to support this view. The relationship between the unemployment rate and the job vacancy rate is consistent with patterns in previous recoveries. Nor is there anything unusual about the size of mismatches between job openings and worker availability by industry.

Such industrial mismatches become larger during recessions, reflecting greater churn in the labor market as workers move between shrinking and expanding sectors; but they decline as the economy recovers. This pattern also characterizes the current recovery, and recent data suggest that mismatches between the demand and supply of labor by industry are back to pre-recession levels.

But, as the US economy recovers, technological change is accelerating, fueling demand for more skills at a time when the workforce’s educational-attainment levels have plateaued. This is the real skills gap that existed before the Great Recession, and it is getting worse over time.

The gap manifests itself in much higher unemployment rates for high-school educated workers than for college-educated workers at every stage of the business cycle. The gap also shows up in significant – and rising – inequality between the earnings of high-school educated workers and those with a college degree or higher.

Earnings gains have been especially strong for those with tertiary degrees, while the real wages of high-school educated workers, especially men, have fallen sharply. It is becoming increasingly difficult for workers with low levels of educational attainment to find high-paying jobs in any sector, even when the economy is operating near full capacity.

The US was the world leader in high school and college graduation rates for much of the twentieth century. Today it ranks in the middle of the OECD countries.

A major factor behind that relative decline has been the US school system’s failure to ensure high-quality education for disadvantaged Americans, particularly children from poor, minority, and immigrant households. According to the most recent census, about one-quarter of children under the age of six live in poverty. They are less likely to have access to early-childhood programs that prepare them for school, and are more likely to attend schools that have high student/teacher ratios and that cannot attract and retain skilled teachers.

As a result of these and other problems, the average American secondary-school student receives inadequate preparation in core subjects such as writing, mathematics, and analytical reasoning, which in turn reduces college enrollment and completion rates. The US experience is consistent with OECD evidence that students from countries with greater income inequality score lower on academic achievement tests. And a recent study by McKinsey suggests that the gaps in educational opportunity and attainment by income impose the equivalent of a permanent recession of 3-5% of GDP on the US economy.

To address the skills gap, the US must boost the educational attainment of current and future workers. That means investing more in education at all levels – in early-childhood education programs, elementary and secondary schools, community colleges, trade-school programs for specific jobs in specific sectors, and financial aid for higher education. Above all, it means addressing the income disparities in educational opportunity and attainment.

Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.

Copyright: Project Syndicate, 2012.

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