UPDATE: Chronic Unemployment

by Ben Atwater and Matt Malick

If you have seen the nightly news in the last four years, you are undoubtedly aware of the unemployment problem in the United States.  Creating jobs has been a centerpiece of both presidential campaigns as the U.S. suffers from an unemployment rate that refuses to fall to normal recovery levels.

The last American recession that was comparable in severity to the Great Recession of 2007 - 2009 occurred in the early 1980s.  Following a spike in oil prices in the late 1970s, coupled with high interest rates that the Federal Reserve instituted to fight inflation, the U.S. economy experienced an acute downturn that lasted from July of 1981 through November of 1982 (16 months).  During this recession, the unemployment rate exceeded 10% for the first time since the 1930s.  In fact, the unemployment rate did not surpass 10% again until 2009.  The Great Recession, by comparison, lasted from December of 2007 until June of 2009 (18 months) and saw a more severe decline in economic activity.

But during the ensuing recovery in the early ‘80s, the unemployment rate fell fairly quickly.  The chart below compares the trend in the unemployment rate in the months following the end of each recession.



The stubbornly high unemployment rate in the current recovery has led many to suspect that we are dealing with structural unemployment rather than merely cyclical unemployment.  In other words, there is a greater percentage of the population that, for a variety of reasons, is likely to remain unemployed for the foreseeable future.

Interestingly, concurrent with high unemployment, we have seen a surge in job openings among American businesses.  The chart below indicates that job openings bottomed in mid-2009 (around the end of the recession) and began a steady uptrend that leaves us with over 3.66 million unfilled job openings today.



Companies may not be hiring more aggressively simply because they cannot find qualified and willing candidates.  If we could match unemployed workers with current job openings, we would theoretically lower the unemployment rate by about 2.4% - from 8.1% as of August 2012 to a fairly benign 5.7% level.

Digging deeper into the demographics of the jobless would seem to confirm that structural unemployment is a serious problem.  The chart below illustrates August 2012 unemployment rates based on education levels.



There is a positive and a negative take-away from this data.  First, it indicates that unemployed workers may be losing their skills and motivation to work.  But second, it also implies that “uncertainty” is not crippling the economy to the degree that we have been led to believe.