Divergent Unemployment Rates

By Tim Duy · February 17, 2009: It is common knowledge that educational achievement significantly impacts labor market outcomes. Still, I was struck by the increase in that disparity as I prepared the following charts for a presentation last week. Consider the year over year change in unemployment rates by educational achievement since 1993:

Unemployment Rate

Note that the increase in unemployment rates for no high school and high school graduates are increasing at a very rapid rate over the past year (note this also reflects rising labor force participation for the no high school group (Jan. 2008 – Jan. 2009), in contrast to falling participation among other groups). In contrast, during the 2001 recession, increases in unemployment rates were comparable. For a closer look at 2001:

Unemployment Rate

And the current recession:

Unemployment Rate

A few thoughts come to mind:

1. Rising structural unemployment. If the housing/consumer debt dynamic led us into this downturn, and, as I think is reasonable to expect, will not lead us out of the downturn, then we can expect that those persons unemployed as a result will continue to face relatively higher rates of unemployment in the future. In essence, it is not clear to which sector these labor resources will be reallocated, especially given anticipated lethargic rates of labor growth on the other side of this recession. I suspect that very strong growth will be required to revitalize a labor market for these individuals (such as that experienced during the information technology boom). No such growth forecast exists.

2. Hysteresis? That is a term that has not cross my mind for many years. Suppose the economy is undergoing a structural adjustment that promises to deliver low growth rates for the next decade, with cycles driven by the start-stop process of fiscal stimulus. Could each new “boom” end with an unemployment rate higher than the low of the previous boom as structural unemployment edges up?

3. Stimulus may also have a differential impact on unemployment. If the jobs generated by fiscal stimulus tend toward workers with higher education levels, then stimulus will not alleviate the problem of rising structural unemployment. Note – this is NOT an argument against stimulus. It highlights the importance of proper structure of the stimulus package.

4. Us versus them. I hate to say this, but certain political partisans could turn this into a morality play…why should your tax dollars be wasted supporting the bottom end of the educational level? They had their chance.

5. Inflation risk? If significant structural issues are in play, perhaps we are fooling ourselves about the low risk of inflation.

Consider Jim Hamilton:

I have in my research instead stressed technological frictions. For example, when spending on cars abruptly falls, there is a physical, technological challenge with getting the specialized labor and capital formerly employed in manufacturing cars into some alternative activity. In my mind, it is a mistake to pretend that any federal program is capable of immediately re-employing those resources into an alternative, equally productive enterprise. More fundamentally, I have suggested that our present situation is as if someone had quite successfully sabotaged the basic functionality of our financial system. Until we once again have a financial sector that can successfully allocate credit to worthy projects, we’re not possibly going to be able to produce as much in the way or real goods and services, no matter what the level of aggregate demand or stimulus package might be. In terms of the textbook Keynesian models that people play with, I’m suggesting that “potential” GDP growth for 2009:Q1– that growth rate which, if we try to exceed it by stimulating aggregate demand, we primarily just get more inflation– is in fact a negative number.

I not ready to declare the end of deflation risks. But I can easily make a story in which structural adjustment combined with misdirected stimulus yielded a higher than expected inflation rate. As always, it is wise to consider the full range of risks to your outlook.

Bottom Line: Yet another thing to worry about.

About Mark Thoma 243 Articles

Affiliation: University of Oregon

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987 and served as head of the Economics Department for five years. His research examines the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables with a focus on asymmetries in the response of these variables to policy changes, and on changes in the relationship between policy and the economy over time. He has also conducted research in other areas such as the relationship between the political party in power, and macroeconomic outcomes and using macroeconomic tools to predict transportation flows. He received his doctorate from Washington State University.

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