Why Is Unemployment Still So High?

The U.S. unemployment rate for January will be released on Friday. A  poll of economists conducted by Dow Jones shows a consensus forecast that the rate will inch up to 8.6 percent from 8.5 percent; whether this proves to be accurate or not, it’s a safe bet that the rate will not fall into the seven or six percent range this time, or the next time.

Economists may quibble over methods used to seasonally adjust January statistics, and whether changes in the rate are due more to people finding jobs, or if they are entering or leaving the labor force, but these issues pertain to small changes, such as 8.5 to 8.6 percent, not to the big improvements that everyone wants to see. Despite one indicator after the other showing positive gains, we keep waiting. Why is this?

It is true that employment is a ‘lag’ variable: after production heats back up to restore inventories that finally clear out when a recession loses its grip, employers need to be as certain as they can be, that investing in new employees will bring in more revenues than it will cost them. Forecasts for increased sales need to be believed, and they need to know if new employer taxes and mandates for higher employee benefits will occur. Until these questions are answered to some tolerable degree of doubt, it’s easier and safer to work current employees more (or bring them back after temporary layoffs), and that is what goes on for a long time.

A related reason is based upon supply and demand for labor (yes, that perhaps overused phrase pertains to people as well). During a recession, the supply of labor – people looking for work – dramatically exceeds the demand for labor, which is the number of workers that employers want to hire. As the economy improves it slowly pushes back towards full employment, and hiring is led by demand for employees. Supply at first is so large that, when it diminishes it isn’t noticed much; it feels like there is no improvement, no new jobs, and that is compounded by more people joining the labor force, i.e. looking for work once again. Further, if demand for workers is weak, the process simply bogs down, which is what might be happening now.

In a study published on Monday in the Federal Reserve Bank of San Francisco’s Economic Letter, Rob Valletta and Katherine Kuang studied the problem of weak labor demand and its role in the current unusually long bout of unemployment, now at some 42 months since the last employment peak. The researchers devised a method to measure demand for labor, by calculating a ratio of unemployed persons to job vacancies at the national level, assuming that vacancies are an indication of jobs that employers want to fill, given proper conditions. The higher the ratio number, the weaker is demand for workers relative to available supply, and vice versa.

Valetta and Kuang found that a chart of their ratio correlated strongly to unemployment since 1982, explaining ‘virtually all the increase in duration when workforce characteristics are also taken into account’. Mismatches of available workers to job vacancies were a factor, but the demand for labor explained unemployment durations more, and also indicated that these durations are lengthening from recession to recession. A BLS release on Tuesday confirmed that among employment costs for the fourth quarter of 2011, benefits costs increased far more than wages and salaries. As stated above, benefits to new employees is often a sticking point to hiring. Is this why we are waiting so long?