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Could Low Educational Attainment Be Slowing the Recovery?

The employment numbers released by the Bureau of Labor Statistics on June 4, 2010, showed a large increase in temporary government employment due to the hiring of workers for the 2010 Census, but showed only a slight increase in private sector employment. The consensus view is that improvements in the labor market will lag the overall recovery, and the fear is that we could experience relatively anemic job growth similar to the two previous recession-recovery cycles. Could a mismatch between the skills and education of employees and the needs of employers be a contributing factor to the slow speed of the recovery in employment?

Manufacturing employment has been steadily declining since 2000 and is now down to about 75 percent of its level in 1995. Over this period, the housing boom fueled the growth of construction employment to a peak of 1.5 times its 1995 level. However, in the wake of the housing bust, construction employment has fallen back down; it is now only 1.15 times its 1995 level. In contrast, employment in the education and health industries has continued to grow through the beginning of 2010.

Industry Employment Indices

Source: Bureau of Labor Statistics.

With respect to educational attainment, the data reveal substantial differences across industries. Workers in the education and health, professional and business services, information, and finance industries (which I will subsequently refer to as high-degree industries) are much more likely to have a bachelor’s degree than workers in the other nonfarm nongovernmental industries (which I will subsequently refer to as low-degree industries).

Educational Attainment by Industry

While the accumulation of job- or industry-specific human capital may make it hard for workers to change jobs or industries as the industry structure of the nation changes, it seems that it will be particularly hard for workers without a bachelor’s degree to move from the low-degree industries to the high-degree industries. It is possible that construction was absorbing some of the workers who lost their jobs as the manufacturing industry declined. However, once the housing market collapsed, construction began losing jobs quickly. In this way, the housing boom may have temporarily obscured the transition of the U.S. economy from low- to high-degree industries.

Consistent with this conjecture is the observation that the fraction of overall employment that is made up of the high-degree industries has increased throughout the past 15 years. The only exception is a plateau that coincides with the years of the housing boom.

Share of Employment in High-Degree Industries

Source: Bureau of Labor Statistics.

While people without a bachelor’s degree have experienced higher unemployment throughout the past 15 years, their rate of unemployment has typically been only about 2 percentage points higher than those with a degree. Currently, however, it stands at more than 5 percentage points higher.

Unemployment Rate

Source: Bureau of Labor Statistics.

So what does the changing makeup of U.S. industry mean for the unemployment rate and the economic recovery in general? Economic research shows that displaced workers who change industries end up with lower paying jobs on average. Furthermore, if a college degree is required for an increasing number of jobs in the U.S. then it may take some time before the labor supply responds to the increased incentives for education. In the meantime, we may be in for a period of lower productivity, lower wages, and higher unemployment.

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