As a recent college graduate, I see many friends and acquaintances struggling to begin their careers. It is true that the unemployment rate is lower for those with a college degree, but it’s still high relative to the past three decades: 4.4% at the end of November, according to seasonally adjusted BLS data, versus an average of 2.7% since 1992. This compares to an unemployment rate of 7.6% for those with some college education, 8.8% for high school graduates, and 13.2% for those without a high school diploma.
I often read about managers who complain that they can’t find workers with the requisite experience for open positions, while recent graduates complain that they can’t find work in their chosen field. There is clearly a mismatch between the skills of college graduates (the labor supply), and the skills necessary for available positions (the labor demand).
This brings up a larger point about structural unemployment and the right way, if there is such a thing, to encourage young adults to pursue careers in which demand for labor remains high and will likely continue to grow. Structural unemployment occurs when the skills of workers do not match the skills demanded by employers. This is distinguishable from cyclical unemployment, which occurs when aggregate demand falls and not enough jobs are available in the economy, and frictional unemployment, which occurs when available workers are unable to find or connect with the employers that demand their skills.
The question is how to incentivize college and high school students to choose areas of study that will lead to careers in fields with high demand for their labor. One obvious option is compensation. Industries with higher demand for labor should pay a higher wage until they fill their labor requirements. There are two problems with this arrangement, however. One is that fields in which labor is in high demand, such as teaching, often do not pay the highest salaries. Another is that compensation often rewards the amount and difficulty level of education rather than its necessity within the larger economy. Although we do need doctors and engineers, we also need construction workers. It makes economic sense to compensate people for the time and money spent on an education (and the opportunity cost of forgoing four years of income), but this does not always direct young adults into the industries in which labor is most needed.
Career counselors and recruiting firms can also help to share information with potential employees about the skills demanded by potential employers, but this still depends on the existence of employees with the requisite skills for open positions, and so does not always help to solve the problem of structural unemployment ex ante. Workers could take the information available from career “middle men” to adjust their skills as necessary, but again, this does not address the problem of choosing their original education to match the skills demanded by firms.
There is also the possibility of centrally planning, whereby the government or some other central agency monitors the labor market and makes predictions about which industries are growing and which are shrinking. The agency could then direct students towards paths of study that will prepare them for the industries in which labor demand is predicted to be high. This option is unattractive for various reasons and is presented here more for the sake of example than as a potential outcome.
I also think there are a lot of immeasurable, emotional factors that go into the decision of what to study or which career path to choose. These decisions are not always rational (remember what it’s like to be 18 years old with your whole life ahead of you?) and can hardly be thought to take into account the labor needs of the entire economy. Some incentives to choose various careers over others do exist (such as compensation), but it’s hard to see many others ways to influence the choices of young adults besides appealing to their own preferences, which are subject to change themselves.
Theoretically the labor market should clear on its own (a process hindered by the existence of minimum wages, a topic that I won’t breach in a single post), but this isn’t always the case. If the forces of labor supply and demand worked perfectly, young adults would fill in the gaps in the labor market where human capital is needed and move away from those where it is not, but the necessity of forward planning and other kinks in the model make this process much more difficult than theory would lead us to believe. The question of solutions raises many possibilities, none of which seem to address the problem well enough to ensure that the labor market functions at its most productive level at all times. Some level of structural unemployment is likely inevitable and is usually considered to be “natural” by economists.