A contrarian take on unemployment has been circulating lately, alleging that the job market is far tighter than conventionally assumed. According to this theory, a surplus of “unemployable” workers is holding the unemployment rate at an artificially high level. Counting these unemployable workers makes the labor market seem far softer than it truly is—this view’s adherents believe that by limiting our unemployment count to only consider potentially-employable workers, we would see a stronger job market rapidly approaching full employment.
The primary evidence for this theory is the persistent gap between the long-term and short-term unemployed. Proponents believe that many of those who have been out of work for more than six months lack the skills required to take newly-created jobs, especially in the reviving high-tech manufacturing sector. Accordingly, the far lower short-term unemployment rate is a better indicator of the true state of the labor market. If this view is correct, we will soon run out of room for non-inflationary growth.
Although plausible, this theory is unlikely. The persistence of the long-term unemployment rate is more likely attributable to the slow pace of recovery in hard-hit sectors, especially construction. While long-dormant workers may need to learn new skills, the workforce will respond to the incentive of new jobs—retraining programs should ensure against the accumulation of unfilled skilled manufacturing positions. Currently, long-term and short-term unemployment are declining at similar rates, a trend that should ultimately put the theory of “unemployable” workers to rest.
The unemployment rate reliably moves in tandem with the number of job vacancies—clear evidence that weak aggregate demand is the true culprit for slack in the labor market. Blaming persistent unemployment on a lack of skills also fails to address the two major hidden weaknesses in the labor market: the millions of underemployed part-time workers seeking full-time positions, and the discouraged working-age unemployed who have temporarily dropped out of the labor force. Both these groups will have to be absorbed by job growth before the economy reaches full employment.
The Federal Reserve shares the mainstream view that unemployment is driven by weak demand, and that the official unemployment rate significantly undercounts—not overcounts—the number of new jobs full recovery will require. Soon, perhaps as early as this week, the Fed will provide a more detailed description of which indicators it is watching to gauge the labor market’s recovery.