In his speech before Congress last night, President Obama argued to a somewhat skeptical public the role of the national government in responding to the continuing employment crisis.
To effectively address the crisis, however, it helps to start from a shared understanding of what the problem is. And on this count, there’s some disagreement, even among the experts.
Some economists believe the fundamental problem is a mismatch between available jobs, and available workers. Proponents of this “structural unemployment” argument, including Minneapolis Fed president Narayana Kocherlakota, see evidence of businesses wanting to hire but not being able to find workers with the right skills. Their preferred approach to reducing unemployment focuses on education and training programs.
Other economists, like Paul Krugman, Brad DeLong, and Bill Dickens, conclude that the problem is not a lack of skills, but a cyclical lack of employer demand for workers. They point out that rates of hiring remain high relative to job openings. They prefer fiscal and monetary stimulus policies that would raise the aggregate level of demand for labor.
Our new analysis finds that depending on where you look, there’s some truth to both sides of the story. We probed beneath the national statistics, at the variable conditions facing workers in America’s metropolitan areas, the building blocks of the national economy. Among the 100 largest of those areas, unemployment rates in July ran the gamut, from 4.7 percent in Omaha, Neb. to 17.5 percent in Modesto and Stockton, Calif.
On the one hand, the recession-induced decline in demand looms large in the unemployment picture in many corners of the country. Take Indianapolis, where the unemployment rate was 8.0 percent in July. The average working-age person in that metro area is slightly better educated than the metro area’s occupational structure would seem to demand. But Indianapolis’ reliance on manufacturing and trade employment meant that it lost more than its share of jobs during the recession, yielding a still-large unemployed population.
On the other hand, some metro areas do seem to exhibit more of a mismatch between available skills and job opportunities. Little Rock’s unemployment rate is similar to that in Indianapolis (7.5 percent), and the metro area specializes in industries that were much less susceptible to the recession: government, education, professional services. However, the average job in the Little Rock area today demands slightly more education than what the average working-age person possesses, slowing the employment recovery there.
Some metro areas like Washington, D.C. (unemployment rate 6.0 percent) combine the best of both worlds–a fairly resilient industry structure, and workers with a surplus of education relative to available jobs. Others like Riverside, Calif. (unemployment rate 14.7 percent) face a double whammy–battered industries (especially construction) and an education gap.
The bottom line is that both education and demand matter for solving the unemployment crisis, but in different measures in different metro areas. The immediate problem mostly results from reduced employer demand in the wake of the recession, but the longer-run gap between worker education and job opportunities could frustrate recovery in some metro areas–and by extension, hold back a full national recovery.
In that light, it’s good that President Obama proposed a mix of policy responses that could help address both problems. Replicating programs like Georgia Work$ could accelerate the training of unemployed workers for available job opportunities, and reduce the degree of mismatch in the labor market. Strategic spending on infrastructure would help increase the demand for labor, especially in the moribund construction sector. Completing free trade agreements with countries like South Korea would benefit exporting industries, especially manufacturing, which has been battered lately. Other policies in his speech, from tax credits for small businesses that hire unemployed workers to broad-based mortgage refinancing, would put more money into the hands of consumers and stimulate aggregate demand. Whether Congress will approve these policies, of course, remains to be seen.
But an informed national solution to the unemployment crisis must recognize that, to paraphrase Tolstoy, each struggling metro area struggles in its own way. Most need to stimulate employer demand, especially in their most prevalent industries. Over half need to up-skill their workers or generate job growth in less education-intensive sectors like the green economy. And some need both. Even if Washington can’t agree on how to respond (and recent history suggests that’s a strong possibility), local and regional leaders can deploy their limited resources more effectively by understanding the sources of the problem in their own neck of the woods.