What exactly is behind America’s stubbornly high unemployment rate? Consider the following…
Many Americans are choosing unemployment benefits over available jobs on offer. Earlier today we highlighted how unfilled job positions were rising at a much faster rate than new hires. We described how some Americans were forgoing job offers due to the fact that they calculated (correctly, from an individual perspective) that it was a better deal to continue receiving unemployment benefits rather than accept many jobs currently on offer.
Is this why unemployment remains so high? America’s unemployment rate has remained stubbornly high. Even though unemployment tends to lag most other economic indicators during a recovery, meager improvement on the employment front has thrown cold water on many sharp rebounds seen for other economic indicators.
The lack of a strong rebound in unemployment is shown below. Note how the unemployment rate has fallen, though not by much:
There has actually been a V-shaped jobs recovery… for job-creation. Thinking back to the anecdote we mentioned earlier today, in regards to a man receiving unemployment benefits who has refused over a dozen job offers, we decided to pull up the latest job openings data. What we found was a V-shaped recovery… in job openings. There’s been a recovery in job creation, there just hasn’t been much of a recovery in job acceptance (thus the high unemployment rate):
The two issues above have created a distortion between available jobs and unemployment. The recovery in job openings combined with stubbornly high unemployment (partly due to people refusing jobs), appears to have created a clearly abnormal spike in ‘The Beveridge Curve’, which is simply the ratio of job openings vs. the unemployment rate.
You can see below that May 2010 (the latest month available from the Bureau of labour Statistics for this graph) stands out from ‘normal’ months. Essentially, there is a historically abnormal level of job openings vs. unemployment, which suggests some sort of distortion.
So what’s causing this distortion between job openings and high unemployment? Can we nail down the exact distortion within the space of a blog post? Of course not, but we can at least open the floor to debate — Might the extension of unemployment benefits have pushed many unemployed Americans to turn down jobs they normally would have accepted? We already have anecdotal evidence of this very thing happening.
Even the knowledge of a potential extension in unemployment benefits might put off the acceptance of a job offer. An unemployed person might wait (we would) until after he knows whether or not he will receive extended government benefits before taking a job with pay equal to or lower than his benefits. Thus as job openings rebounded, as shown in the middle chart above, many Americans may have decided to hold out due to hopes of extended unemployment, thus keeping unemployment high despite a rebound in job creation.
In this fashion, the ‘Beveridge Curve’ chart above might visualise how America’s extended unemployment benefits have distorted the employment recovery during this cycle. Basically — One reason that the unemployment rate has remained high for an abnormally long time is that unemployment benefits have been extended for an abnormally long time during this cycle.
This doesn’t mean that extending unemployment benefits is necessarily ‘right’ or ‘wrong’ in terms of policy, we’ll let others debate this further. We’re just saying that extended unemployment benefits could be a major factor behind America’s perplexing-ly high unemployment rate right now. This is because if we didn’t have extended benefits right now, suddenly a lot more of the unemployed would be accepting positions from within the rising number of job openings. The job openings rebound would translate into employment.
The current distortion means companies might need to hike their salaries… or we could see a sudden and sharp drop in unemployment ahead. From this perspective, America’s high unemployment is less of enigma. Jobs are being created, it’s just that unemployment benefits are out-competing them so far. Maybe companies need to hike their salaries, maybe they are unrealistically low… or perhaps we’ll see a sudden drop in the unemployment rate once waves of Americans become unqualified for further unemployment benefits. Unless of course they are extended yet again.
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