Study: Unemployment Rate Unlikely to Fall Below 8%

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Unemployment in construction has remained high (Lucy Nicholson / Reuters)

A new study by a group of International Monetary Fund economists and an economist from the San Francisco Federal Reserve suggests that the unemployment rate is not coming down anytime soon, at least not to where it was before the recession.

The study, which is called New Evidence on Cyclical and Structural Sources of Unemployment, has to do with something called structural unemployment, that’s the amount of people out of work not just because the economy is weak, but because they lack the skills to fill a job opening. A number of people have argued that most of the problems with unemployment purely have to do with the recession. People aren’t spending so companies aren’t hiring. When the recession ends, the unemployment rate will shoot back up. Last year, Nobel Prize winning economist and New York Times columnist Paul Krugman wrote:

On the contrary, all the facts suggest that high unemployment in America is the result of inadequate demand — full stop.

Those like Krugman who have been on the cyclical side of the argument have been pushing for more stimulus. But two years past the end of the recession and the unemployment rate remains stubbornly high. The IMF paper suggests that the unemployment problem is worse than people think. Here’s why:

People have long pegged the structural unemployment rate at about 5%. That means that even when the economy is healthy there will still be a certain amount of people out of work. That happens for a number of reasons, the biggest of which is they don’t have the skills to qualify for any available job. But it could also be because someone is making a career transition or just looking for a new job.

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The IMF paper suggest the structural rate has probably been a bit higher than that for a while. Ever since the late 1970s,  rate has been around 6%, according to the research paper. But the disruption of the Great Recession has caused that rate to significantly spike up for the first time in decades up to about 8%. Why would that be?

Most of it has to do with construction jobs. In the 1990s and 2000s, the size and the persistence of the housing boom drew a lot of workers into the construction business. Now a lot of those people are out of work. As a result, the unemployment rate in the construction industry stands at an extremely unhealthy 16%. “The guy who was a construction worker can’t easily walk into an office and do something productive,” says Bharat Trehan, a San Francisco Fed economist and one of the study’s authors. That’s structural unemployment.

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Trehan says the study doesn’t necessarily argue against more stimulus. Stimulus might still be able to quickly move the unemployment rate from its current 9.1% to 8%. And unemployment has been known to dip below the structural level – it was below 4% in the late 1990s – but it doesn’t stay long without some effort to retrain workers or build new industries that can absorb the displaced workers. It seems that’s the type of stimulus we need, and the type that we really haven’t gotten. Construction workers don’t have to be turned into office workers. Mining right now has an unemployment rate of just 3.5%. And that does seem like a job that construction workers could do. Now you might want to ask do we really want to promote mining. But there are other professions where we definitely need people and where added production is already in need. Farming anyone.