Benjamin Franklin said, “An investment in knowledge pays the best interest.” Today’s stubborn employment situation suggests American workers need to make these needed investments.
National and Idaho unemployment rates remain at least 9 percent. The Treasure Valley unemployment rate is closer to 10 percent. Despite economic growth and higher profitability for many area employers, the labor market is in a funk.
When studying markets, economists look at supply and demand, of course. Demand in the labor market comes from employers, and like most products, when the price (wage) falls, the quantity of workers demanded rises. Supply is made up from the workers themselves. When the price (wage) rises, more workers are willing to work; that is, the quantity of labor supplied to the market increases.
But to understand market conditions, economists don’t stop with just downward-sloping demand and upward-sloping supply lines. We also need to know which line is steeper. This is known as elasticity of demand or supply.
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The elasticity, or responsiveness, of demand or supply determines how the market quantity changes. In the labor market, demand is much more elastic than supply. The quantity of labor supplied tends to be inelastic, or relatively insensitive to changes in the wage. This means that employers are much more price sensitive than workers. Businesses are more likely to hire new workers when wages drop slightly, whereas it takes a larger increase in wages to persuade more people to enter the labor force or, conversely, a larger drop to persuade them to leave.
Inelastic labor supply means that changes in the number of workers willing to work has a bigger effect on total employment than changes in employer demand. An increase in demand may have a big effect on prices (wages) but may not increase overall employment much.
Labor supply in the United States and Idaho has changed very little. The U.S. civilian labor force at 153.7 million is just slightly lower than when the recession began in December 2007 (153.9 million). The Valley’s labor force is unchanged since last year. Without a willingness to work for much less, the outlook for those most needing work is unlikely to change.
Labor supply is particularly inelastic when jobs require specialized skills or lengthy training periods. In such markets, even employers willing to hire have a hard time finding workers.
For this reason much of the current unemployment is structural, rather than cyclical. If all the 2008 layoffs were because of the recession, the jobs should be back by now. Instead, unemployment remains high because most workers don’t have the needed skills necessary for available work.
University of Chicago economist Erik Hurst has preliminary estimates suggesting that structural unemployment may account for 3 percentage points of total unemployment in some states. This is particularly true in states such as Idaho where construction was previously a big driver of employment.
We can push businesses to hire all we want, but without changes to the workforce, the employment situation and economy will remain weak.
Ben’s investment recommendation is ever sounder today.
Reach Peter Crabb at prcrabb@NNU.edu.
Professor of finance and economics at Northwest Nazarene University in Nampa. His column, published weekly at IdahoStatesman.com, appears here every other week.