GLOBAL ECONOMIC CRISIS
U.S. Unemployment: Matching Skills to Jobs
By Marcello Estevao and Prakash Loungani
IMF Western Hemisphere and Research Departments
May 5, 2011
- U.S. unemployment rates have been slow to decline
- Structural factors account for some of the continued high unemployment
- Targeted policies to better align jobs, skills are prudent response
With the onset of economic recovery in the United States, unemployment has started to fall, but quite slowly, and long-term unemployment remains alarmingly high. During the Great Recession of 2007–09, the U.S. unemployment rate doubled, from 5 percent to 10 percent.
Now unemployment hovers around 8¾ percent and the slow pace of labor market recovery has sparked concerns about whether deeper structural factors were behind some of the unemployment increase during the recession and are now impeding the recovery.
Structural factors refer to underlying mismatches between supply and demand for jobs and skills. Such mismatches have risen in the U.S. economy as a whole and even more in some states.
Moreover, housing markets have behaved quite differently across the country, often interacting perversely with mismatches to raise unemployment. House price declines may have impeded some mobility of out of high-unemployment states.
IMF research suggests that these structural factors likely account for about 1½ percentage points—or only about a quarter—of the increase in the U.S. unemployment rate during the Great Recession. So, on the one hand, there is reason to be optimistic that the recovery of the economy will continue to push unemployment below the present rate of 8¾ percent. But, on the other hand, pushing the unemployment rate below 6½–7 percent may take more targeted structural policies.
It is common in the economic literature—though neither factually nor politically correct—to refer to people with high educational attainment as “high-skilled” and those with lower educational attainment as “low-skilled”.
Nevertheless, using these broad categories to equate educational attainment with skills, Marcello Estevão and Evridiki Tsounta measure the mismatch in each U.S. state between the demand for workers of various skills and the supply of those skills.
Skill demand is gauged by the composition of high-skilled, semi-skilled, and low-skilled workers in the state’s employment. Skill supply is determined on the basis of the educational attainment on the state’s working-age population. If the skill composition of a state’s workforce is very different from the skill composition of its population, that shows a mismatch.
Several states have seen large increases in skill mismatches over the course of the Great Recession (see Chart 1). These include Delaware—a financial hub; Hawaii—with large reliance on tourism; and Michigan—an auto hub. Skills mismatches continued to rise in almost all states even after the recession has ended, partly explaining the stubbornly high unemployment rate. Reflecting these mismatches, the unemployment rate for low-skilled workers increased disproportionately during the recession.
With the onset of the recovery, demand for high-skilled labor has been on the rise. In coming months this mismatch might intensify further as housing construction remains lackluster for a while, while sectors that use more high-skilled labor (the export and health sectors, for example) see a surge in investment and activity.
Chen, Kannan, Loungani, and Trehan measure the extent of industrial mismatch using data on industry stock returns. Increased dispersion in stock market returns across industries is also signaling an increase in structural unemployment.
When underlying shocks to the economy have disparate impacts on the fortunes of industries, stock market returns vary more widely across industries. This was the case, for example, in 1974 when the oil price shock altered comparative advantage across industries, and in 2000 with the bursting of the dot.com bubble.
During the Great Recession, dispersion in stock returns reached historic highs, partly reflecting the hits to the financial and construction sectors. This indicator explains about a quarter of increases in the unemployment rate, with bigger impacts on long-term unemployment (see Chart 2).
The difficulties in the housing market are well known. House prices are 30 percent below peak levels, one in 12 mortgages is delinquent for at least 30 days, and 4½ percent of outstanding mortgages are in foreclosure. These numbers are particularly staggering in certain states, including Arizona, California, Florida, Michigan and Nevada.
How U.S. states performed economically shows up more clearly once information on state-level housing market conditions and skill mismatches is combined. Some states (California, Michigan, Ohio, Florida, and Arizona) have been hit by the double whammy of skill mismatches and high foreclosure rates. Others (notably Montana, North and South Dakota, Nebraska, Kansas, Colorado, and Texas) have not fared as badly.
How to respond
Mismatches and regional differences in housing markets will dissipate with the recovery. But a prudent approach would be to complement macroeconomic policies with targeted measures to raise hiring and clear the housing market. Of course, their cost and effectiveness should be closely evaluated given fiscal challenges in the United States.
Against this background, the job bills enacted in response to the recent crisis, which extended unemployment insurance while providing subsidies to net hiring for small businesses, were welcome. The Congressional Budget Office suggests that such tax credits are effective in terms of employment creation per dollar. And as part of the 2009 American Recovery and Reinvestment Act, the amount of money for training was doubled.
Ways to pay for it
More action to reduce structural problems could be paid for by reducing tax expenditures or enacting a forceful entitlements reform. Priority could be given to subsidies to net hiring, as research has shown they are more effective in raising employment rates than other active labor market policies, although the subsidies would need to be well targeted to avoid redundancy and waste. One alternative would be to condition the subsidies to the hiring of longer-term unemployed.
The U.S. government has already undertaken numerous measures to support the housing market, including temporary tax incentives for home buyers and measures to mitigate the foreclosure epidemic. Additional measures were introduced last fall, including temporary foreclosure forbearance to the unemployed and some assistance to underwater mortgage holders—a long-standing recommendation by the IMF.
Measures to raise the number of mortgage modifications and “cramdowns” could also be important, as they would help to clear the housing markets more quickly, while restoring households’ balance sheets, thus also tackling cyclical unemployment.