Can't Blame the Recession for All This

 | Feb 01, 2012 | 5:00 PM EST  | Comments
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Considering that the jobs report is due to come out Friday, I wanted to address unemployment in the U.S. We talk about this as though it is a very recent phenomenon, due entirely to the recession and a lack of demand. Some, however, note there is a structural element to it, and that a number of workers' skills don't match the needs of employers. It likely has elements of both -- and, in reality, the housing bubble masked longer-term trends that have been in place for some time now. The economy needs different workers from what it had in the past. It also needs fewer of them to produce the same amount of goods and services.

Consider that real gross domestic product is now about 0.8% higher than it was at the end of 2007, but that total employment is still 4.4% less now than it was then. Obviously, productivity gains explain much of this difference, but so does the fact that the economy needs different kinds of workers now compared with what it demanded in the past.

You can go back further to see this trend. GDP at the end of 2011 was 18.7% higher than it was in December 2000, but employment is still currently 0.5% lower now than it was 11 years ago. In between -- from December 2000 to December 2007 -- we saw GDP grow by 17.8%, yet the economy added just 4.1% more workers. The workers added then were, in part, related to the housing boom. Others were added in just a few industries located at opposite ends of spectrum regarding levels of income and required education.

Even prior to the recession, the divergence between where job creation was and wasn't happening was notable, and it can give us a sense of what might be a realistic possibility for the future direction of the unemployment rate. But, first, what is the unemployment rate? Yes, the overall percentage was 8.3% as of the end of December. However, this all-encompassing statistic masks large differences when the data is segregated by occupation, using data from the Bureau of Labor Statistics.

Unemployment by Occupation

You can see it's a huge range. Let's dissect the data a different way -- this time, by industry sector and where jobs were created and lost in two periods: 2001 to 2007 and 2007 to 2011.

(The data in the above table is from the BLS household survey, while the data below are from its separate establishment survey. There are discrepancies between the two data sets regarding the number of employed people.)

Unemployment Trends by Industry
Source: Bureau of Labor Statistics

The important takeaway from these data is that, even prior to the Great Recession, jobs were being created at a slower pace than the rate at which the labor force was growing. Between January 2001 and December 2007, the unemployment rate rose from 4.2% to 5.0%. That translated into 1.6 million more unemployed people during that period, encompassing the tech-wreck recession of the last decade.

What is key here is that, in the 2001-to-2007 period, the areas that saw job growth and job losses were very divergent. In fact, during that period, if you strip out healthcare, there would have been virtually no net new jobs created in aggregate. Remember, this was before the Great Recession. Further, rather than this having been a result of economic growth, job growth here was related to an aging population, financed as it was by rising healthcare costs. In the remaining sectors, job losses in manufacturing and information (perhaps due to offshoring) offset job gains elsewhere. It's here where we see diverging employment trends.

Manufacturing, a sector whose workers generally don't need higher education, lost 3.3 million jobs --however, construction added 663,000 positions, providing some opportunity for those displaced workers. Leisure and hospitality, another low-wage sector, added 1.5 million jobs in that previous period.

Also in that 2001-to-2007 period, the only significant private sectors with job growth that substantially outpaced labor-force growth -- besides construction and leisure and hospitality -- were education and healthcare and professional services. These sectors, both of which generally require a significant educational background, saw employment increase by 3.1 million and 1.2 million people, respectively. At the same time, governments -- especially state and local -- created 1.5 million new positions, having been flush with cash from the housing boom. However, one-third of those government jobs have since been lost.

What you're left with is an economy undergoing a transition that actually began a number of years ago. Again, the housing bubble masked much of that trend -- but, overall, the jobs that have been created over the entire past 11 years have been at two ends of the spectrum as far as educational background is concerned. Knowledge jobs are at one end, while the remaining jobs have been in low-wage, low-skill industries.

The dilemma this places on policymakers is immense. The U.S. does not simply need to recover employment from the Great Recession. It needs to navigate a demographic and educational shift in job creation and determine who will fill those jobs. Otherwise, these trends will leave many of the currently unemployed stranded. These forces are larger than a simple issue of supply and demand, and they can't be remedied by any Fed quantitative-easing program of any iteration.

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