A natural rate of unemployment
Recently, Waupaca City Administrator Henry Veleker and I conducted a retention call with one of the manufacturing businesses in the city.
As is the case so often with these visits, we sdiscussed a significant challenge for this business: finding enough qualified workers to fill their job openings.
As he spoke about his dilemma, the owner mentioned something he recently read regarding unemployment. He said the federal government released a study showing that the natural rate of unemployment in the U.S. had risen from 4 percent to 7 percent.
The current rate of unemployment in Waupaca County is 7 percent, according to the latest figures from the Wisconsin Department of Workforce Development. I decided to do some research on the natural rate of unemployment.
The natural rate of unemployment is the unemployment rate that occurs because of frictional unemployment (workers leaving jobs for personal reasons), structural unemployment (the mismatch between workers skills and jobs available), and surplus unemployment (higher wages encourage companies to reduce their workforce).
The only way an economy could have a zero percent unemployment rate is if it is severely overheated. Even then, wages would probably rise before there could actually be no unemployment.
In fact, the lowest unemployment rate in the U.S. was 2.5 percent in May and June of 1953 when the economy overheated due to the Korean War. When this bubble burst, it kicked off the recession of 1953. For this reason, economists often say the natural rate of unemployment should be no less than 4 percent (from 1996 through 2000, Waupaca County's unemployment rate was less than 4 percent).
Researchers at the Federal Reserve Bank of Cleveland have computed that the new natural rate of unemployment will hover between 5.6 percent to 5.7 percent. Researchers with the Federal Reserve Bank of San Francisco estimate the new natural rate of unemployment will be as high as 6.7 percent.
The natural rate of unemployment has risen, according to researchers, because both frictional and structural unemployment are higher, thanks to the recession. As jobs are slowly created, the unemployment level will drop from its current U.S. rate of 8.5 percent. However, the natural unemployment rate is predicted not to go below the new estimate levels because workers are less likely to move or quit their jobs now, which keeps people who quit jobs for personal reasons from finding new employment (frictional unemployment).
In addition, there are more workers who have been unemployed for so long that their skills no longer match the current needs of businesses (structural unemployment).
The new percentage numbers of natural unemployment, put forth by the Federal Reserve Banks, reinforce the anecdotal evidence that manufacturers across the U.S. have been reporting for several years now: there are currently 600,000 unfilled manufacturing positions in the U.S.
At a 5.7 percent level of natural unemployment, Waupaca County has been at "full employment" for 19 of the past 21 years. The only years we were above 5.7 percent were the last two years - 9.8 percent in 2009 and 8.9 percent in 2010.
If we have actually been hovering around full employment for much of the past 20 years, then the next 20 years will be critical for us to be able to sustain our current economy, because the boomers will be leaving during that period of time. We have kept them around through the 2000s largely because their retirement funds have taken significant drops during the recession. However, over the next 20 years, they will not want or be able to continue working in critical sectors like manufacturing and health care.
I was recently on a business retention call to Sara Lee (Hillshire) in New London. When we left, the plant manager showed us the wall of service plaques. They have a large portion of their workforce in the 30, 35 & 45 years of service categories. Of course, during our discussions, we spoke at length about the challenge of finding qualified people to replace the talent that will soon leave their business.
These recent discussions at manufacturers in Waupaca and New London reinforce my belief that we need to solve this dilemma from within. We are not going to grow (i.e. import workers) our way out of this problem because most of the U.S. is experiencing the same issues: higher natural unemployment numbers and the pending retirement of the baby boom population.
That is why I am devoting as much of my time as possible to the Waupaca County School-to-Manufacturing program. This program has proven to me over the past three years that we can address this challenge from the perspective that makes the most sense, which is to retain the talent that grows here.
We need to build critical relationships between our high schools and the businesses that drive our economy. I chose to start with the manufacturing sector because of its impact on our economy.
The high school and manufacturers in Clintonville have shown that we can successfully build these relationships. It has now started in New London, with District Administrator Bill Fitzpatrick and passionate teachers like Brian Kursewski building relationships with manufacturers like Neumetal and Bemis Curwood.
Dave Thiel is executive director of the Waupaca County Economic Development Corporation.
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