The monthly jobs report released today provided little comfort to those hoping for a strong turnaround in the job market over the next few months. Private-sector payroll employment levels in the nation increased by just 67,000 jobs between July and August. However, most of the gains in private sector employment came from health services (+28,000) ...]]>

The monthly jobs report released today provided little comfort to those hoping for a strong turnaround in the job market over the next few months. Private-sector payroll employment levels in the nation increased by just 67,000 jobs between July and August. However, most of the gains in private sector employment came from health services (+28,000) and social assistance agencies (+12,000), both heavily funded by government sources. Offsetting these private-sector gains were the layoffs of another 110,000 temporary Census workers, as the 2010 Census winds-down. The net result is that the overall payroll employment ended up declining by 54,000 jobs over the month.

The nation’s unemployment rate for August was 9.6%, essentially unchanged from the prior month’s rate of 9.5%.Over the past few weeks, the argument has emerged that much of the now 9.6% unemployment rate problem in the U.S. is “structural” in character (due to skill mismatches between jobs and job-seekers). National Public Radio reported that economists at the International Monetary Fund (IMF) think that most of the unemployment below 6.75% is structural in nature.

This means that pump-priming policies like a second round of stimulus or an expansion of the Federal Reserve’s monetary easing strategies may not reduce the unemployment rate back to the 4.5% level of 2006-07, because structural barriers such as geographic and occupational skill mismatches have worsened. Such structural barriers mean that even as Gross Domestic Product expands, jobs don’t get filled because workers lack the skills to fill them or because workers are unwilling to move to take available jobs for which they may be qualified primarily because so many mortgages are under water and the overall weakness in the housing market. This view was recently echoed in an unsigned article in The Economist that essentially argued that because so much of the current unemployment is structural in nature, there is not much the government can do about it.

Structural unemployment problems do not respond very much to policies like monetary easing (making money very cheap for banks) or fiscal policies like a second round of stimulus. Essentially, the IMF is arguing that the “full employment unemployment rate” is 6.75% in the U.S. and that, efforts by the government to reduce the unemployment rate below this will fail and produce inflation.

So what does the evidence suggest about a worsening skills mismatch in the American economy? Has the full employment unemployment rate increased to 6.75%? To answer this question we must begin by understanding three basic causes of unemployment and understanding the meaning of a full employment unemployment rate. Unemployment rates at the national and state levels never get to zero percent because of the job-seeking behavior of individuals and the worker-seeking behavior of firms. Job-search unemployment is associated with workers searching for the best jobs for themselves, and employers trying to find the best workers, meaning there will always be some level of what economists call ‘frictional unemployment.” Both companies and workers will take some time to find the right match, and this means some jobs go unfilled for a while and some workers remain unemployed until both sides find the right match.

A second source of unemployment is structural and is associated with education, skill and geographic mismatches between jobs and job-seekers. Technological change and foreign competition make some occupational skills and abilities obsolete while increasing the demand for others. The general tendency in the U.S. is for these changes to result in increased demand for better educated, more highly skilled workers, with a much diminished demand for high school dropouts and lower skilled workers. So one definition of a full employment unemployment rate would be that unemployment rate where all unemployment is either frictional or structural.

The third major type of unemployment (cyclical unemployment) is associated with a decline in the aggregate demand for goods and services that occurs in a downturn in the business cycle such as the Great Recession of 2008-09. The decline in aggregate demand leads to a decline in the demand for workers. Cyclical unemployment is characterized by lots of unemployed workers chasing only a few job vacancies, as contracting businesses eliminate positions and lay off workers, causing unemployment to rise sharply and the number of vacant jobs to fall sharply.

Economists think about full employment in two distinct ways: the Beveridge definition of full employment that is based on the relationship between unemployment and job vacancies and the non accelerating rate of inflation rate of unemployment (NAIRU) that focuses on the relationship between the unemployment rate and the inflation rate.

The Beveridge approach defines full employment as that condition where there is approximate equality between the number of unemployed workers and the number of unfilled jobs. The U.S. is very far away from a full-employment condition under the Beveridge concept. During June, there were 14.6 million unemployed persons in the nation’s labor force and 2.9 million unfilled jobs, a ratio of 5 unemployed workers for every vacant job. This implies that 80% of the unemployment problem in the nation is associated with insufficient aggregate demand for labor, and that just 20% is frictional or structural. With a labor force of 153.7 million, the Beveridge measure of full employment unemployment rate would be about a 1.9%—a long way from IMF’s 6.75% full employment unemployment rate.

The NAIRU full employment unemployment rate is a bit trickier to assess. It is defined as that rate of unemployment at which efforts to further increase aggregate demand will result in an acceleration in the nation’s inflation rate. Monetary authorities have adopted a goal of a U.S. inflation rate of around 2% per year. During most of the past 15 years or so, the full employment unemployment rate under this definition was generally thought to be around 4.5%, although this definition has varied over time reaching 6.5% during the stagflation era of the 1970s.

So what are the risks of inflation?

Not much right now. Indeed, the major threat to most Americans is deflation, as they see their housing values decline, the values of their stock portfolios shrink and a worrisome downward pressure on their wages as the labor market continues to perform poorly. Indeed, the second quarter 2010 GDP growth rate was revised from a low 2.4% annual pace of economic growth to an anemic 1.6%. Such a sluggish pace of growth certainly diminishes any serious concerns about inflation in the foreseeable future. Rather, this sluggish rate of growth has begun to raise questions about a “double-dip” recession, with Goldman Sachs raising the odds of a double-dip recession to one in four.

A debate is now emerging about how to respond to the economic and job market situation. One camp led by Paul Krugman and many of the leading democratic members of Congress argues that we should double down on a new stimulus program, and that the problem with the last one was that it wasn’t big enough.

A second group (perhaps including the IMF) is composed of inflation hawks who argue that we already have massive deficits and a huge monetary base that together pose a real threat of inflation down the road. A third group agrees with Krugman that the threat of deflation is by far the most serious, but that last year’s STIM program was a failure and would be a disaster to engage in STIM Part Deux. They support tax-reduction strategies aimed at reducing the cost of hiring workers and putting more income into the hands of workers by declaring a payroll tax holiday for a year or so.

How the debate about structural unemployment and the full employment unemployment rate gets framed will have a powerful influence in determining the path of economic policy and the nature of economic and labor market activity in the coming months.

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Neeta P. Fogg is senior economist at the Center for Labor Market Studies at Northeastern University. Paul E. Harrington is associate director of the center.

Last week, a banker asked us a thoughtful question about the relatively low unemployment rate among adult bachelor’s degree holders (25 years and older) we had written about in The New England Journal of Higher Education. Noting that the U.S. Bureau of Labor Statistics (BLS) release this month shows those age 25 or older with ...]]>

Last week, a banker asked us a thoughtful question about the relatively low unemployment rate among adult bachelor’s degree holders (25 years and older) we had written about in The New England Journal of Higher Education. Noting that the U.S. Bureau of Labor Statistics (BLS) release this month shows those age 25 or older with a bachelor’s degree have an unemployment rate of 4.5%. he asked, “Could we assume that these 4.5% are structurally or frictionally unemployed, that is, do adult college grads have a full employment rate of unemployment? After all, the full employment unemployment rate for the economy as a whole is generally thought to be around 4.5%.”

We think that the 4.5% unemployment rate for college graduates is not the full employment rate of unemployment. The Beveridge full employment concept was developed during the early post-World War II period and is defined as approximate equality between the number of unemployed workers and vacant jobs at a given point in time. When this occurs, all unemployment represents either structural (skills or geographic mismatches) or frictional (job search unemployment) imbalance between labor supply and demand.  Under the Beveridge definition of full employment, there is no unemployment caused by insufficient demand for labor, since there are enough vacant jobs to eliminate all unemployment if the labor market were perfectly efficient. In practice, this means severe labor shortages in high-end labor markets that can coincide with continued albeit modest excess supply in lower-end occupations. Certainly, this is what much of New England looked like in the 1998 to 2000 period when the regional unemployment rate fell below 3%, and severe shortages existed in much of the college labor market, especially in scientific and engineering fields, along with tightening in the health professions at that time (although the shortages in the health fields were to come after 2000)

The Beveridge full employment condition occurs when the national (state or regional) unemployment rate falls to around 2.5% to 3%.  At that point, there is a near equality in the number of unemployed workers and vacant jobs.

The common view that the full employment unemployment rate occurs at around 4.5% is based on the NAIRU (non-accelerating inflation rate of unemployment) concept of full employment. NAIRU is defined as that unemployment rate at which efforts at further reductions in unemployment will result in upward wage pressures that increase the inflation rate.

The 4.5% unemployment rate for age 25 and older college grads published by BLS should not be interpreted as an indication of full utilization of these adult college graduates. During 2007, when the overall unemployment rate in the nation was fluctuating between the NAIRU full employment level of 4.4% and 4.7% for most of the year, the unemployment rate for holders of bachelor’s degrees and above aged 25 and older ranged between 1.8% and 2.2%. . So we would argue that the full employment unemployment rate for adult college graduates is around 2%. Unemployment above this level would suggest that some unemployment among these college grads is associated with slack labor demand.

Currently, there are no job vacancy measures nationally that measure job openings by either by education or occupation to see what the balance of vacant jobs and job seekers might be in that labor market segment. A few states do have measures of job vacancies by occupation. In Rhode Island, with an unemployment rate in the 12% range during 2009, we found that in the college labor market occupations, there were more than six experienced unemployed workers for every one vacant job. In Massachusetts, the ratio was closer to 3-to-1, with the state unemployment rate hovering around 9%.

It is important to note that other manifestations of labor market underutilization problems for college grads also increase as the economy shifts away from full employment. Nationally, we find that about 3% of employed college grads are working involuntarily in part-time positions and an additional 2% have withdrawn from the labor force even though they have a job desire and would go to work immediately if a job was available. Adding these shares together with the college grad unemployment rate, we find that about 9.5% of the adjusted college graduate labor force has a labor market problem of some type.

A quick look at newly minted college graduates reveals marked difficulties in finding work in the college labor market. Our analysis of 2009 Current Population Survey data on the labor market experiences of college grads under 25 who were not currently enrolled in school found that while 83% were employed, only two thirds of these recent college grads had college labor market jobs. The remaining one-third worked outside of the college labor market. They were employed in teen labor market jobs or jobs that most often employed high school graduates or those with even fewer years of schooling, frequently in retail trade and low-end service jobs. This means that only about half of new college grads who don’t go on to grad school were employed in a college labor market position.

So the short answer to this great question is that there is plenty of excess labor supply in the college labor market, and few signs of frictional or structural imbalances. Despite all this bad news there are plenty of reasons to think college grads are much better off than everyone else … that’s part of the reason the share of high school graduates going to college last fall was at an all-time high.

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Neeta P. Fogg is senior economist at the Center for Labor Market Studies at Northeastern University. Paul E. Harrington is associate director of the center.

June 2009 is seen by many as the end of the Great Recession. Strong growth in GDP following massive monetary and fiscal responses to the collapse in housing and financial markets meant that the economy was on the mend. Yet a year later, 1.1 million fewer people are working, and the unemployment rate is stuck ...]]>

June 2009 is seen by many as the end of the Great Recession. Strong growth in GDP following massive monetary and fiscal responses to the collapse in housing and financial markets meant that the economy was on the mend. Yet a year later, 1.1 million fewer people are working, and the unemployment rate is stuck at 9.5%. Worse still, more than one million individuals have left the job market since April. If these individuals had not quit looking for work, the nation’s unemployment rate this morning would have been 10.3%. The fraction of teens at work has hit a record low, with just 25% of 16-to-19 year olds working this summer.

The jobs report released Aug. 6 has a lot of political and economic significance.

Economically, this means that concerns among fiscal and monetary leaders may now seriously focus in the threats of a deflation. Deflation is the opposite of inflation insofar as it is characterized by reductions in the aggregate level of prices and wages in the economy. See economist John Makin of the American Enterprise Institute for a discussion of this.

One critical manifestation of the deflationary pressure exerted by this downturn has been the sharp decline in housing prices. The worst effects of deflation occur when consumers and firms expect prices to decline. With an expectation of future price declines, they delay consumption and investment activities and instead hold on to cash to capture a better bargain down the road. This means that consumption slows and savings increase as firms hold on to cash. Both families and firms seek to pay-off debt and cash becomes king. Why? Because unlike inflation, where a dollar can buy less tomorrow than today, with deflation, a dollar buys more tomorrow than today.  Today’s poor jobs report means that the monetary authorities may seek to expand the monetary base in an effort to keep interest rates and the cost of borrowing low. Congress and the president may be more likely look to finance another round of stimulus of some type, including what some have called a back-door stimulus, that will hopefully have a stronger jobs component to it than the last round of "STIM" that didn’t seem to do much in the private sector.

Politically, there are only two more jobs reports between now and the midterm elections in November. Expectations for GDP growth in the second half of this year have been curtailed and are at a level that would fail to generate a sufficient number of jobs to reduce the overall unemployment rate. Along with the weak showing in the new jobs report, this suggests a diminished likelihood of a quick turnaround in the labor market in time for November. Those candidates for congressional and statewide positions who needed a stronger labor market environment didn’t get the summer of recovery promised by Joe Biden, but they may get a fall from grace this autumn.

Deflation is very bad news for those parts of the higher education system that rely on debt financing. As the risks of deflation become more vivid, colleges that hold lots of debt will be forced to pay off those loans with more valuable dollars that could crowd out other kinds of spending. Students may be more reluctant to take on debt to finance school in a weak labor market where employment prospects are poor and nominal wages are declining. The Chronicle of Higher Education’s recent article on student loan defaults is a scary reminder of the limits of student debt.

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Neeta P. Fogg is senior economist at the Center for Labor Market Studies at Northeastern University. Paul E. Harrington is associate director of the center.

Evidence about the role that “soft factors” like student engagement and school environment play in influencing whether high school students go on to enroll in college is hard to come by. Over the past two years, the Center for Labor Market Studies (CLMS) of Northeastern University, with support from ...]]>

Evidence about the role that “soft factors” like student engagement and school environment play in influencing whether high school students go on to enroll in college is hard to come by. Over the past two years, the Center for Labor Market Studies (CLMS) of Northeastern University, with support from the Nellie Mae Education Foundation and the Rhode Island Board of Governors of Higher Education, has explored the impact of these and other factors on the college-going rates of recent high school graduates from Rhode Island public high schools.

This study is based on a unique database that CLMS painstakingly constructed linking institutional level data about high school students, teachers, parents and school-level characteristics with information on college-enrollment behavior of high school graduates from each public school in the state. The unit of observation in this study is the high school. The measure of student high school experiences in this study is defined here as encompassing not only the academic and social attitudes, practices and outcomes of students, but also the academic and social organization and climate of their high schools, and the involvement and experiences of their teachers and parents. The sets of measures developed for this study provide new insights into the role that these soft factors play in explaining differences in college enrollment rates across high schools in the state.

Summary of Key Findings

Student Academic Performance. Consistent with many other studies of the determinants of college enrollment, we found moderate to strong connections between alternative measures of academic ability and college enrollment. Measures of academic performance across high schools including the mean mathematics and verbal SAT scores, percentage of students scoring at the proficient level in the 11^th grade standardized test in English language arts and mathematics, and the graduation rate of the high school, all had a statistically significant association with a higher college enrollment rate.

Student Demographic Characteristics. Again consistent with many other studies, we found moderate to strong connections between socioeconomic status and college enrollment rates across high schools. The college enrollment rate is low among schools with higher shares of students with disabilities, Hispanic or black students, students from low-income families and students with poor English-language proficiencies. Schools with higher shares of students who access primary health care through community clinics or emergency rooms have lower college attendance as well. Conversely, schools with larger shares of children who access primary health care through a physician’s office have higher college attendance rates. Access to health care through community clinics or emergency rooms is more likely to occur among children from lower-income families, while children from higher-income families are more likely to use a physician’s office to access primary health care.

Student Behaviors. Schools with high dropout rates and high rates of turnover in the student body have considerably lower college attendance rates among those who graduate. However, consistent with our research in other states, we found that incidents of student suspension are not related to college attendance in Rhode Island. Student health risk behaviors such as illegal drug use, the use of tobacco products and alcohol have very modest connections to postsecondary enrollment, whereas student nutritional practices including consumption of fruits and vegetables and eating breakfast regularly have a fairly strong relationship to college enrollment in Rhode Island; we speculate this may also be closely related to socioeconomic status. Excessive television viewing (two hours or more per day) is fairly strongly related to lower rates of college attendance, whereas excessive use of Internet-based services (email, text messaging and chat rooms) is not related to college attendance in the state.

Student Engagement and Connectedness. Measures of student engagement with their teachers and connectedness and a sense of belonging in the school are found to be unrelated to college attendance rates of high schools in Rhode Island. Out of six variables measuring student engagement and connectedness, only one variable—how students get along with their peers—is modestly negatively correlated with the college attendance rate at the high school. Schools with a larger share of students who have trouble getting along with each other tend to have lower college-enrollment rates.

School Environment and Expenditures. The study uses a number of measures to gauge the school environment including the college-going climate, career-preparation activities, student safety and the availability of social support from teachers and staff members. Among the variables measuring the college-going climate in the high school, we found that attending a high school with many college-going peers and peers who engage in college-related activities like taking advanced placement exams and SAT tests is closely related to the college attendance rate. Access to teachers to discuss college does not appear to have a strong connection to college going rates. We find no association between college-going rates and career-preparation activities including career-exploration activities, field trips and career training in the classroom and through activities in the community. Social support from teachers related to family and personal problems does not correlate to college attendance, while academic support from teachers does. Student reports on the safety of the school environment are not related to college-going rates at Rhode Island’s high schools. The study found no relationship between per-pupil expenditures and college-going rates of high schools.

Teachers: This study examined the relationships between college-going rates at high schools and teacher quality, curriculum and instructional practices, teacher supports, and teacher engagement and connectedness. Our analysis found that only a few teacher-related measures are related to students’ college going rates. Teacher quality—measured by shares of teachers who are hired with emergency certification—has a weak correlation with the college-going rate of high schools in Rhode Island. Higher shares of classes not taught by qualified teachers is not related to the college-going rate of Rhode Island high school graduates. Only one factor out of the list of curriculum and instructional practices—regular instruction in writing skills—is found to have a moderate to weak negative relationship to college enrollment. Other teaching practices including examining student work to guide instruction, relating instructional material to student interests, as well as teaching students problem-solving and decision-making techniques are unconnected with college-going rates.

Teacher supports in this study are measured by the self-reported level of support in the form of professional development, curriculum development, support from colleagues and exchange of information with them, availability of sufficient preparation time and information about school improvement, decision-making opportunities and authority regarding management of student discipline and behavioral problems. Although teacher views of the level of supports that they receive vary sharply, these reported levels of support are not connected with the college enrollment rate of students. Teacher connectedness and engagement measured by teacher perceptions of their connectedness toward other teachers, students and their parents are largely unrelated to the college-going rates at the high school.

Parents. Three measures of parent engagement and connectedness with the school are found to be related with the high school’s college going rate. Higher college going rates were found at schools where large shares of parents believe that the community supports the school, the school promptly responds to their concerns and questions, and the school asks them to volunteer.

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Neeta P. Fogg is senior economist at the Center for Labor Market Studies at Northeastern University. Paul E. Harrington is associate director of the center.