Structural Employment Issues ... The "Guy Rate" and What Looks Like a Long Slog Ahead

Fed Chairman Ben Bernanke believes our U.S. high unemployment issues are more cyclical in nature than structural.

He admits, however, that nobody knows for sure and that in any event, it's a close call. While I hope he's right, I think he's wrong.

First, let's review some facts contained in an article about the number of full time U.S. male workers in the age group 25-54. In What Does Bernanke Know?, a most interesting chart appears and sheds some light on the subject of cyclical versus structural:

"There are many reasons to distrust the unemployment figures. The most obvious is that those who give up looking for work no longer count among the official "unemployment." (Extraordinary, but true.)

But we know Ben Bernanke looks at the raw data.

What is he seeing? . . .

The chart focuses on just one simple number: The percentage of adult men, age between 25 and 54, who are in full-time work.

Let's call it "the Guy Rate."

It's not a perfect measure of the jobs market, but it's a key one and it cuts out a lot of noise. It ignores most kids in grad school, early retirees, and new mothers who choose to stay at home. It counts as unemployed a former $80,000 a year machinist who has given up looking for work. It also counts the one who is still stuck working one night shift a week at his local Shell station.

It focuses only on men of prime working age, it counts all of them, and then deducts only those who are in full-time work. . . ."

My take is straightforward. Based on only that one simple chart above, it's evident that our unemployment problem today may indeed be more structural than cyclical. And if that's the case, what's changed? Let's look closer.

In Fed Signals Resolve on Rates, Mr. Bernanke admits that while he still believes it's a cyclical problem, there's considerable room for debate:

"The Fed chairman took on some thorny economic issues in making his case for low rates. Among them is the question of whether the nation's still-high unemployment rate represented a so-called cyclical problem that can be resolved simply by encouraging economic growth with low interest rates, or a fundamental structural problem in the labor markets that growth itself and the Fed can't fix.

Mr. Bernanke came down on the side of those who argue the problem is predominantly cyclical and low interest-rate policies are helping to alleviate it. But many economists disagree with him, and he acknowledged the matter isn't settled.

The debate about cyclical and structural unemployment has been going on for a couple of years. Economists generally say cyclical unemployment is caused when weakness in the overall economy pushes down demand for goods and services and therefore the need for workers that provide them. Structural unemployment reflects deeper problems, such as a gap between the skills workers have and those that employers want. Structural problems don't necessarily disappear as the economic recovery gains traction.

Mr. Bernanke—in making his case for primarily cyclical unemployment—pointed out that newly unemployed workers and long-term unemployed workers all experienced diminished prospects of getting new jobs during and after the downturn. That suggests the job market hasn't punished one group of people disproportionately to others. Instead, he said, there weren't enough jobs for a wide range of workers in a wide range of industries. "The fact that labor demand appears weak in most industries and locations is suggestive of a general shortfall of aggregate demand, rather than a worsening mismatch of skills and jobs," he said.

But some economists disagree and the stakes are high. "You could be seeing a policy error in the making," said Wells Fargo economist John Silvia, who lists an array of factors that he says point to structural problems in the job market, which he says faster economic growth can't resolve.

Employment of college graduates is up 5.8% in this recovery, while employment of high school dropouts is down 3.9%, according to Labor Department data. This suggests that low-skill workers are having a harder time finding work."

Summing Up

Contrary to Fed Chairman Bernanke, I believe that our economy is undergoing fundamental structural change. And with respect to employment, both the manufacturing and construction sectors will employ relatively fewer U.S. workers in the future than they have in past decades, as will all levels of government.

Continuing improvements in information technology will lead to ongoing large productivity gains, and lower credit card and home mortgage related debt levels will restrict construction related activity

All these things will limit future employment gains, especially for the lower skilled. Finally, increasing low wage competition from an expanding global work force will make job gains and pay levels more difficult for lesser skilled workers as well.

In the end, of course, competition and markets for goods and services, as well as labor, will dictate who works in which sectors, how many work, and often where that work will be done, along with how much those workers will be paid.

Union leaders will do all they can to interfere with this fundamental and necessary adjustment process, and many politicians will come to the short term aid of organized labor officials. In the end, however, markets will set the prices and the acceptable productivity adjusted real cost of labor as well.

Knowledge workers will be much more important to U.S. employment levels than they have been in the past. However, unskilled and semi-skilled workers will have a tougher time finding employment. Education and knowledge will be the keys to future employment.

The longer we collectively take to recognize the simple fact that knowledge will be the key to the future, the longer it will take to get back what used to called "normal" rates of unemployment.

Simply put, knowledge workers will comprise the heart of the future American workforce.

As a result, we could well be in for several years of relatively high unemployment, even as the U.S. economy demonstrates more resilience and near term strength than the rest of the developed world.

We'll get there in the end, but first we have to get started.

Thanks. Bob.