Jobs, skills and education

"There's something happening here, what it is ain't exactly clear."

-- Buffalo Springfield

The words of this 1960s rock song could describe the current job market. Several quarters into the recovery, the unemployment rate continues to hover near 10 percent. If we include discouraged workers who have quit looking for work and those working part time who want to work full time, then the unemployment rate is near 16 percent. Adding to the jobless problem is an increase in the average duration of unemployment. Job skills appear to depreciate quickly. The longer a person is unemployed, the tougher it is to re-enter the job market at a comparable wage. Homeownership, once the symbol of the American dream, has become an economic millstone around the neck of many unemployed workers. With 20 percent of mortgages underwater, the work force has become less mobile than at any time in recent history.

Unemployment can be broken into "frictional" and "structural" factors. Frictional unemployment is transitory job loss associated with the business cycle and the natural churning of the economy; companies contract, merge and go out of business. The frictionally unemployed tend to find new work within a short period. In contrast, the structurally unemployed do not possess skills that match available job openings.

The "normal" rate of unemployment is roughly 5 percent and believed to be about equally divided between structural and frictional job loss. However, some think that there has been a rise in structural unemployment. Increases in gross domestic product have not caused a decline in the jobless rate, neither has a rise in job openings. With the exception of government and construction, unfilled jobs have increased in virtually every sector. David Autor decomposes workers into three categories: low-skill, middle-skill and high-skill. Autor found that the economy has been shedding middle-skill jobs for the last decade. Some believe the trend began in the 1990s.

The decline was partly hidden by a bubble that generated middle-skill jobs in the construction trades and real estate, jobs that are unlikely to return. The average duration of unemployment has also lengthened because a worker who loses a middle-skill job is not qualified for high-skill employment but is reluctant to accept a lower wage. Job loss studies have shown that despite a decline in permanent income, people will persist in their efforts to maintain their standard of living.

The decline in middle-skill jobs has been attributed to increases in the cost of middle-skill employee benefits such as health insurance, globalization and information technology that has been more successful in the mechanization of middle-skill than low-skill or high-skill jobs. It is not economically feasible to design a robot to fold clothes and replace a low-skill employee at The Gap, but it does make economic sense to replace a middle-skill bank teller with an ATM or an airline ticket agent with an e-ticketing machine.

Historically, the rate and duration of unemployment is significantly lower among college graduates relative to those with a high school diploma, and the advantage has increased during this recession. However, there are signs that a college diploma no longer guarantees a high-skill job. As a percent of the total U.S. college graduates in the 25-to-29-year-old age cohort, about 33 percent work in low-skill jobs. Among developed countries, only Spain and Canada have a higher rate of college graduates employed in low-skill work. In Germany, Australia, Britain, Sweden and The Netherlands the percentage in low-skill work is significantly lower than in the U.S.

Grade inflation, an erosion in academic standards and an increase in less demanding, postmodern degree programs, will result in many more college graduates being saddled with a lifetime of student debt but without the skills necessary to land a good job. Unlike other debt, personal bankruptcy does not discharge student loans. In congressional testimony this summer, Steven Eisman, the hedge fund manager who made millions betting on the real estate bust, compared the subprime mortgage crisis to the high rate of student loan defaults among graduates of many for-profit higher education providers. The problem is not confined to for-profit educators. It might take a while, but, like housing, the market will eventually catch up to all colleges and universities in the business of producing diplomas rather than high-skill graduates. Unfortunately, it will be too late for many students.

Dr. Michael Devaney is a professor of finance at Southeast Missouri State University.