Education and Structural Unemployment

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.

9 thoughts on “Education and Structural Unemployment

    • Good question, I would be interested to hear your thoughts. A few possibilities why the government doesn’t currently centralize job placement: sheer size of the task, philosophical disagreement with labor market intervention (i.e. best to leave it to the free markets), unwillingness of citizens to participate in (should theoretically lead to elected officials who don’t centralize job placement, obviously only applies in functioning democratic government). Other ideas?

      • Government job placement would be horrible. This is basically what communism was. What happens when you want to switch jobs? Where do yo put people that want to work in a industry, but this is unrealistic bc knowledge, fit, etc.

        The less the government does the better. I don’t want my tax being used to build a HR bureaucracy. Want your job search to be like the worst most complicated busy DOL experience?

        I want private well trained efficient HR firms or divisions of companies to do this, not the government.

  1. Communism was an extreme example of attempting to efficiently allocate labor. They way overdid it because the information problem created by attempting to predict where someone will maximize their production is far too great to be solved by even the most intelligent governments. In capitalism and a free labor market, workers attempt to place themselves and usually go for either what maximizes their income or what makes them happiest, if they can find that job. Since the job that makes them the happiest will most likely be where their production output is relatively higher, possibly maximized, it makes sense that every effort be made to direct people to what makes them happiest and then help them gain the skills to do that thing. There are many psychological tests that exist today that can help identify any strengths/weaknesses that someone might have and those can be used as a starting point for guiding and informing an individual, but the choices will have to be up to that person. Lots of schools lack any type of a program that attempts that, and those that try aren’t very good at it. I also think that professionals should try to play a more active role in the education process, especially in later high school and college. Some professors, however smart, cannot provide the information that some professionals can. Also: standardized, exchange traded labor contracts for common professions which are regional. Thoughts? I’ve also wondered if it would be more efficient to abolish minimum wage and unions and just provide a subsidy from the government derived from a re-weighted income tax bracket (heavier to the wealthy). It’d kind of be like redistributing the wealth to capital owners created from the increased efficiency in the labor market down to the laborers who are now suffering the lower wages. If the deadweight loss from the increased income tax burden is less than the loss retrieved from the labor market “floor” removal then wages+subsidy should be higher under the new tax if it is taxed properly.

    Thanks for the outlet to ramble 🙂

  2. To touch on the question of how to effectively incentivize college students to pursue more lucrative and career-viable areas of study, I think the role of compensation is just one facet of a more complex solution. Numerous studies indicate (sorry, no link to primary material) that compensation as one part of the employee incentive structure holds less weight than others; primarily, social status of that profession, opportunities for professional growth, as well as perceived social and absolute economic impact. The often remarkable disparity between the status of one profession and its actual feedback (positive or negative) into the larger economy is certainly a cause for concern.

    The most salient example that comes to mind is the incongruities of social status, compensation, and real economic impact between teachers and lawyers. In this case, the first two categories appear to be running contrary to the third: basically, lawyers and attorneys are exalted and enjoy premium salaries while their absolute impact on the larger economy is not comparable, and has even been dwindling in recent years due to industry saturation. However, due to the high regard of somebody accomplished in jurisprudence in the states, students continue to flock to this profession despite falling median wages, rising levels of law school tuition, and one of the highest industry unemployment rates in the country. Teachers, on the other hand, are often admonished for having wages which are union-based rather than merit-based, and do not enjoy such a lofty societal status (how many side-eyes have been given at any mention of a fellow student choosing to go into elementary education?). To boot, they are often held responsible for the widening education gap and America’s free-fall from the top of most international education rankings. Yet, the economic benefit they bring to society is immeasurable, as they are responsible for (and have so far done a good job in) cultivating our nation’s minds and in turn, fostering the human capital necessary for a healthy, thriving economy.

    As a result, there is a major distortion in the allocation of capable, top-flight graduates to a profession which holds over-the-top status yet does much less for the real economy than its pay grade suggests (this notion can also be applied to parts of the financial services sector, particularly investment banking, which boasts a level of pay for analysts and managers which is questionable considering its real economic output in terms of value added to society, or lack thereof). However, in countries like Singapore, Finland, and South Korea, where unparalleled economic growth has come as a result of heavy investment in university and public education, teachers (in terms of purchasing power) are often paid upwards to 250% more than those in the US. Not only are they handsomely rewarded, but they are among the most respected members of society, along with doctors, engineers, public officials, etc. In turn, legions of top university graduates flock to the teaching profession, where competitiveness of the industry is on par with medical school admissions in America.

    So, to wrap-up, I think that public esteem alongside compensation vis-à-vis certain professions will help to rationalize a labor market which often does too much to allocate resources based on “difficulty level of education” rather than “its necessity within the larger economy”.

    Thanks in advance for listening to my personal tangent!

    Suggested readings:
    http://www.nytimes.com/2011/05/01/opinion/01eggers.html
    http://www.nytimes.com/2011/03/16/education/16teachers.html

    • Thanks for the comment Julian! I’m glad you expanded on the role of social status and public esteem in the labor market. These intangible factors are near impossible to capture in any numerical model, but are still important considerations. Very well-said.

      The question then becomes, how do we increase public esteem for professions that provide large economic benefits to society (e.g. teachers) in an attempt to rationalize the labor market?

      • Wow…a grandiose task indeed.

        I think the answer requires a mix of public policies, particularly in the form of public-private partnerships as a means of increasing government expenditure on education (this way, philanthropists can sleep at night knowing that they’ve given money to a homegrown cause that benefits the US, and the government can avoid being labeled as union-coddlers or communist central-planners, or whatever). America also is in dire need of a bona fide culture shift. A successful example of a pioneering organization on the policy front is Teach for America: not only is it causing a positive change in public sentiment towards the teaching profession, successfully landing intelligent graduates from some of our elite schools, but as a non-profit, TFA pools resources dynamically both from federal funding as well as private donors.

        Also, taking the steps necessary to ensure that achieving the requisite level of schooling or certification for each profession is not only affordable, but indicative of that profession’s economic worth. For example, raising the bar for prospective teachers, requiring higher credentials and passing of a test like the GRE, helps to vet out incapable candidates. On the other hand, the legal field is much more complicated because law schools really have little incentive to discontinue the rat race to the bottom. Despite the fact that median law school tuition is at its highest level in several decades, perpetuated by students seeking shelter from an uncertain job market and university aims to comply with ABA accreditation standards, ultimately making it less economically sensible to pursue with each passing day, the supply of students seems to be continually outpacing demand for lawyers.

        All in all, pay those in a certain profession a salary which is comparable to their societal worth, which will ultimately increase competitiveness. I think that increased competitiveness will ultimately lead to higher social standing.

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