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Thoughts on the August Unemployment Numbers



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The unemployment rate only reflects those who do not have jobs and are looking for them. It ignores those who have given up. As such it understates the number of job shortages in the economy.

The current downturn appears to involve structural unemployment that is likely to last for a while. If we recover quickly from the recession and the ranks of the unemployed shrink rapidly, their skills and productivity will be preserved rather than disappear from the economy. But the longer they remain unemployed, the greater will be the deterioration of their skills, and thus the lower will be the economy’s productivity in the future.

It is, however, true that the U.S. labor market was due for a structural shift independent of the recession. We had, e.g., too many construction workers (we built too many houses) and too few energy experts (indicated by our heavy dependence on foreign energy). The transformation of the workforce’s skills will require some time.

It will be impaired if the government tries to dictate what skills workers should have. The government does not possess a crystal ball to reveal the type of skills that will be needed in the future. The structural adjustment is best left to market forces — which would provide appropriate premiums on the most valuable skills, thereby giving workers an incentive to develop the right kind of human capital. The government’s only proper role would be to provide effective tax incentives for job training — paid for with cuts in wasteful government expenditures on, for example, wars.



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