What’s Really Going On With the Nation’s Unemployment

Last week, the Bureau of Labor Statistics announced that economy added 54,000 non-farm jobs in May, far fewer than the 165,000 expected by pundits. A quick look at the detailed release shows that several sectors lost jobs. The Local Government sector lost about 29,000 jobs, Manufacturing shrank by 5,000 jobs, and retail lost another 8,000.

These numbers reflect the end of some stimulus programs, extreme weather in the Midwest, supply chain disruptions due to Fukashima, and a continuing structural shift in the US labor market.

The latter is most likely a permanent change that will continue to drive the labor situation for years to come. This is called structural unemployment. Unemployment due to a recession, bad weather, or some other temporary factor is often called seasonal unemployment.

The chart shows how the distribution of jobs across industry sectors has changed over time.

We define an index for each sector that tracks the sector's share of the total number of jobs and set it to 100 for the reference period (shown in blue). Over time, the number of jobs in each sector changes. If a sector is adding jobs relative to other sectors, the index increases, if it is shedding jobs, the index decreases.

Back to 1994

The red line shows today's labor market relative to the labor market of 1994. We see a shift away from government, the post office, and manufacturing, and towards education, health, professional services, and resource driven industries.

This amount to a systemic shift from less skilled jobs in manufacturing, government, and even retail and transportation, to more skilled jobs in professional services (accounting, law, IT), education, and health. Leisure and Lodging as well as Mining and Logging are growing sectors that still provide opportunities for less skilled workers.  However, it is unlikely that they can absorb all the workers from the shrinking sectors.

This shift to more skilled jobs is almost certainly irreversible, and it will most likely create a large pool of permanently unemployed lower skill workers. The green line supports this view. It shows how the distribution of jobs across the sectors has changed since the height of the financial crisis in 2009.

The Biggest Employment Gains

Not surprisingly, the biggest gains were in government jobs as a result of various stimulus programs, and the largest drops are in Construction and Professional Services. However, the share of manufacturing jobs has continued to decline even as the sector lead us our of the recession. This suggests that efficiency gains have reduced the need for lower skilled labor even during times of sharply rising demand.

Sectors  like Construction or Leisure, that have traditionally employed such workers, have not participated in the recovery so far. One reason is that these sectors are consumer-driven. This puts in place a positive feedback cycle. If many potential consumers are unemployed, these sectors will struggle, which keeps people unemployed. Conversely, if these sectors are doing well, they employ more people and transform potential consumers into actual consumers, which increases demand.

Leading up to the financial crisis, easy credit allowed consumer spending to feed on itself. The US economy enjoyed many years of solid growth and low unemployment while public and private debts rose to record levels. The crisis was inevitable, because no credit line is inexhaustible.

Post crisis, the feedback cycle switched directions. Now slow consumer spending is keeping unemployment high, which in turn keeps consumer spending slow.

Policy makers and the media seem to think that this mode of the economy is anomalous and needs fixing. However, in this mode, consumers spend in line with their incomes and don't need to take on more debt. It is a long-term sustainable economic model and a more accurate reflection of the true economy than the bubble phase before the crisis.

Now that structural unemployment has been revealed in the post bubble economy, the US will have to develop ways to mitigate the problem. Europe has been struggling with the same issues for years without finding effective solutions.Whatever the US response will be, it is likely to be expensive. One more reason to get serious about putting public finances on a sustainable path so there is some room to deal with this and other unanticipated problems.

Posted by Martin Gremm

About the author

Marc Schindler, CFP®
Marc Schindler, CFP®

One Comment

Leave a comment
  • Hi, Marc: great article–thanks for your analysis, and recognition of structural unemployment.

    I’m wondering how several other trends may play into the unemployment situation. While the shift may be to more skilled workers, employers say they cannot find candidates who have the right skills. Even with 6 or 7 candidates per opening, thousands of jobs in the US are going begging–due to lack of “right” skills.

    The unemployed believe they cannot afford to go after the skills needed for a new position and, in fact, get no tax credit for a new career direction. Employers, often with access to training credits, insist that candidates come “fully skilled” or that government funding pay for the skills development.

    Many of the needed skills–especially those based in technology are sent to lower cost labor markets. Many of the ‘middle class’ jobs that require skills and education fall into this category. The economic development successes in many communities often feature jobs, yes–entry level and not economically-feasible work for many in the unemployed or underemployed ranks.

    I recognize the significant gains in efficiency that businesses achieve through technology, and many have come through the recent economic turmoil with the capabilities to “do more with less” or so they believe. Record profits show that it’s really not about “the economy”–money, yes; the economy, no.

    The same economic models and economic thinking that created a US economy in the 20th century cannot be used to create a strong economy in the 21st…yet that’s exactly what current business models and MBA programs promote. While I don’t have the answers, I offer these suggestions.

    Providing tremendous context and food for thought is “The Tyranny of Dead Ideas” by Matt Miller. Should be required reading for anyone who cares a whit about the current economic challenges. Additionally, workers must recognize and incorporate into their Life and Financial planning the work/career/security reality of the structurally changed employment model. Some fee only financial planners have begun to educate their clients and support them in creating strategic responses to the new workplace–becoming active owners of their future rather than victims.

    Janine Moon
    Author, Career Ownership

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Copyright 2014 FiGuide.com   About Us   Contact Us   Our Advisors       Login