Free & Clear: March 2014

Working on it
By John Hood

North Carolina’s labor market has been improving over the last 2½ years. From June 2011 to December 2013, employers created about 184,000 new jobs in the state. A separate measure by the U.S. Bureau of Labor Statistics — the household survey — shows an increase of 161,000 employed North Carolinians during that same period. By both measures, the state’s growth rate exceeded the national average.

North Carolina also had one of the largest drops in the standard unemployment rate — from 10.4% in mid-2011 to 6.9% at the end of 2013 —  in the nation. But job creation wasn’t the only explanation for that drop. The share of working-age North Carolinians employed or looking for work, a statistic known as the labor-force participation rate, declined during that period. Though the phenomenon is national and particularly pronounced in Southeastern states, it’s fair to say that our recovery will look comparatively lackluster until labor force participation stops its marked decline and perhaps even rises a bit (although the retirement of baby boomers will put downward pressure on the rate even in the best of times).

Labor-force participation, once an arcane subject for economists and government statisticians, has become a hot political topic. At the national level, Republican critics of President Barack Obama say its decline invalidates his claims about national economic recovery. In North Carolina, the sides are reversed — with Democratic critics questioning Gov. Pat McCrory’s claims about a “Carolina Comeback” — but the argument is essentially the same.

If we could get past the partisan posturing and look at the available evidence, we might find some common ground on which to fashion effective solutions. The best place to start is to consider the federal government’s broadest measure of the labor market, the U-6 rate. It includes 1) the jobless who are actively looking for work; 2) the discouraged who have stopped looking for work; 3) other “marginally attached” workers who aren’t in the job market because they are in the midst of relocating, retraining or shouldering family responsibilities; and 4) those who are working part time but would rather work full time — the underemployed.

Unlike the traditional U-3 unemployment rate, the U-6 isn’t produced for every state every month. Instead, the Bureau of Labor Statistics produces 12-month averages each quarter. For the most recent period, calendar year 2013, North Carolina’s U-6 rate was 14.7%, including the unemployed (7.9%), discouraged workers (0.7%), other marginally attached workers (0.7%) and involuntary part-timers (5.4%).

That represents a lot of slack in the rope, one might say. In a good year, North Carolina’s U-6 rate ought to be much lower, in the 9%-10% range. That’s not an indictment of our state alone. In fact, few states have had a larger drop in the U-6 rate than North Carolina has over the past three years. In other words, persistent unemployment and underemployment is a national problem, not a localized one.

That doesn’t mean that potential solutions must be national. Indeed, a point of consensus among most labor economists is that a mismatch between worker skills and job requirements is a major factor in creating structural unemployment and underemployment. The problem occurs on both ends of the labor market. It represents too many longtime workers who have lost their jobs, attempted to find other jobs and found that their skills are no longer sufficient to earn them full-time employment in the same fields. It represents too many young people who graduate from high school or college and discover that they, too, are insufficiently trained for the current labor market. And it represents too many employers deciding not to create jobs in the first place, at least not domestically, because they don’t think they can find skilled workers.

What can policymakers do about structural unemployment and the jobs-skills mismatch? The familiar refrain is to improve the quality of and access to formal education, which is true as far as it goes. But education and training are complementary, not synonymous. Jobless rates even for recent college graduates are relatively high. Nor will additional funding for traditional job training do it, as government-run programs have a poor track record of placing participants in productive employment.

One potential solution is to expand industry-led apprenticeship programs. Germany and Switzerland are international models for how to do this. About 70% of high-school students in Germany and Switzerland participate in apprenticeships. There also are national models, including Pennsylvania and Massachusetts, where educators do a better job of infusing high schools and even middle schools with high-quality career and technical education.

For older workers, policymakers should consider reforming unemployment insurance to allow those recently laid off to receive a lump-sum payment (in exchange for fewer weeks of benefits) to make it easier for them to enroll in company training programs or community-college courses so they can retrain quickly. North Carolina also should review its occupational licensing and other labor regulations to ensure that the state does not erect too high a hurdle for dislocated workers looking to change careers.

In a sense, both sides of North Carolina’s political debate are right. The state’s rate of job creation has exceeded the national average since 2011. But it’s not been strong enough by itself to bring hundreds of thousands of idled North Carolina workers back into full-time employment.


 

John Hood is chairman and president of the John Locke Foundation. You can reach him at jhood@johnlocke.org.