October 07, 2010

Economics Group

John Silvia, Chief Economist

john.silvia@wellsfargo.com ● 704-374-7034
Anika R. Khan, Economist
anika.khan@wellsfargo.com ● 704-715-0575

Structural Unemployment: Fact, Fiction or Too Early to Tell?

Much has been discussed about the obstinately high unemployment rate. Is structural unemployment the
answer? An industry analysis shows no broad-based evidence, but it may be too early to tell.

Our Two Cents on Structural Unemployment Job Seekers Ratio by Industry

Ratio - Unemployed / Job Openings, Recovery: 2001 vs. 2009
In August, the unemployment rate rose to 9.6 percent, but it has been
Leisure and 2.4 2001 Recovery
stubbornly around this elevated level or higher for well over a year. Hospitality 4.5 2009 Recovery

Economists and policymakers have been engaged in heated debates about Education and Health 0.8
As of July 2010
(2001 recovery is based on
the underlying cause for the sustained levels of joblessness. Much of the Services 2.7 13 months into the expansion)

discussion has focused on structural unemployment. Structural Professional and 1.9

unemployment suggests there is a fundamental mismatch in the number of Business Services 2.7

people who want to work and the number of jobs that are available for their Trade, Transportation, 3.2
and Utilities 5.2
skills. The presence of structural unemployment means there are no easy
fixes and any recovery in the labor market could be agonizingly slow. Manufacturing
5.4
6.8
Structural Unemployment by Industry
10.9
If we look at the number of unemployed workers to job openings by Construction
20.1

industry, we find the ratio of job seekers seems to be in line with the 0.0 5.0 10.0 15.0 20.0 25.0

previous recovery. The construction industry, however, is a clear outlier

with more than 20 unemployed workers qualified for each job opening, Peak Unemployment Rate by Industry
Percent, NSA, Recession: 2001 vs. 2007
which is almost twice the number of job seekers from the previous Prof. and Business 9.1% 2001 Recession
expansion. Even the manufacturing sector, which was also hard hit, Services 12.4% 2007 Recession

remains roughly in line with the previous expansion at almost seven Edu. and Health 4.4%
Services 6.7%
unemployed workers per job opening. This suggests there are signs of
10.0%
structural unemployment in the construction industry where workers’ skills Leisure & Hospitality
14.2%

are not easily adaptable elsewhere. Another way to determine whether Trans. and Utilities
6.6%
11.3%
skills match is to compare the peak unemployment rate in the current
Wholesale & Retail
recession to the 2001 recession. Again, the construction sector is an Trade
6.9%
10.5%

obvious outlier with the peak unemployment rate reaching a staggering 27 7.4%
Manufacturing
percent, which is almost double the peak rate in the previous downturn. 13.0%

A Closer Look at Construction Jobs Construction

14.0%
27.1%

How can we further check the existence of structural unemployment in the 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

construction sector? Wage rigidity is yet another way to test for structural
unemployment. Sticky wages occur when firms ration scarce jobs, and Construction Average Hourly Earnings
In Dollars, Real (CPI Adj.) vs. Nominal, Seasonally Adjusted
wages adjust sluggishly to the supply and demand of labor. Nominal $26.0 $26.0

construction average hourly earnings grew at a fairly consistent clip

beginning in 2006 when the series began. Since the start of the year, $25.0 $25.0

earnings appear to have flattened in real and nominal terms, which could
suggest some wage rigidity. To be sure, we would need to see the $24.0 $24.0
construction industry recovering without an improvement in employment.
As we are only a little more than a year into the recovery, such analysis is
$23.0 $23.0
still too premature; the cause could be cyclical versus structural. If there is
indeed an issue of structural unemployment, what is the impact?
Construction jobs make up only 4.3 percent of the overall labor market, so $22.0 $22.0

any impact would be limited. The loss of skills, however, by the 2.1 million Real Average Hourly Earnings: Aug @ $25.2
Nominal Average Hourly Earnings: Aug @ $25.2
construction workers during the downturn is an obstacle to growth. $21.0 $21.0
2006 2007 2008 2009 2010

Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Wells Fargo Securities, LLC Economics Group

Diane Schumaker-Krieg Global Head of Research (704) 715-8437 diane.schumaker@wellsfargo.com

& Economics (212) 214-5070

John E. Silvia, Ph.D. Chief Economist (704) 374-7034 john.silvia@wellsfargo.com

Mark Vitner Senior Economist (704) 383-5635 mark.vitner@wellsfargo.com
Jay Bryson, Ph.D. Global Economist (704) 383-3518 jay.bryson@wellsfargo.com
Scott Anderson, Ph.D. Senior Economist (612) 667-9281 scott.a.anderson@wellsfargo.com
Eugenio Aleman, Ph.D. Senior Economist (612) 667-0168 eugenio.j.aleman@wellsfargo.com
Sam Bullard Senior Economist (704) 383-7372 sam.bullard@wellsfargo.com
Anika Khan Economist (704) 715-0575 anika.khan@wellsfargo.com
Azhar Iqbal Econometrician (704) 383-6805 azhar.iqbal@wellsfargo.com
Ed Kashmarek Economist (612) 667-0479 ed.kashmarek@wellsfargo.com
Tim Quinlan Economist (704) 374-4407 tim.quinlan@wellsfargo.com

Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer
registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the
Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through
subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A, Wells Fargo Advisors, LLC,
and Wells Fargo Securities International Limited. The information and opinions herein are for general information use
only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does
Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any
such information or opinions. Such information and opinions are subject to change without notice, are for general
information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or
as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated
banks and is a wholly owned subsidiary of Wells Fargo & Company © 2010 Wells Fargo Securities, LLC.

SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE