Why the Fed Can’t Solve the Jobless Crisis

Why the Fed Can’t Solve the Jobless CrisisOn the surface, the latest monthly release of the jobs data from the Bureau of Labor Statistics shows tepid job gains. The unemployment rate did drop to 8.1% from 8.3% the previous month, but that was due to a drop in the labor force participation rate. The total for non-farm jobs created for the month of August was 96,000, far below what this country needs to lower the unemployment rate through job creation—not lowering the numbers through people who are giving up looking for work.

However, this unemployment rate is slightly misleading, not only because the government is not counting the millions of people who have dropped out of the labor force, but also because some parts of the labor force have an extremely low unemployment rate, which is not reflected in the total. For example, if we look at the unemployment rate for people with a bachelor degree or higher, the rate is 4.1%. That is quite low for an economy that is barely growing. While the Federal Reserve might consider additional monetary stimulus to bring the total unemployment rate down, I think that action misses the real point behind the numbers—more money is not going to help increase the education and skill level of America’s unemployed workforce.

Some analysts might point to the high number of low-paying, low-skilled jobs. I would agree that is a problem, but it stems from the fact that there isn’t an excess of highly skilled people who are out of work. In fact, in many industries there are massive shortages. Don’t forget, the unemployment rate can’t ever be at zero. So an unemployment rate at 4.1% is almost at full capacity. While the Federal Reserve and the media might point to the millions of unemployed who do need help, I think that adding another trillion dollars of funds won’t resolve the underlying problem.

Additional stimulus by the Federal Reserve might lower the unemployment rate on the margin, but massive structural problems exist. It’s evident in the government’s own statistics. The higher the education and skill levels a person may have, the lower the unemployment rate. The Federal Reserve simply can’t fix a structural problem by throwing more money into the system. More monetary easing by the Federal Reserve will just lead to institutions taking cheap money and investing in the stock market and commodities like gold. A higher market is great for the economy and businesses, I completely agree, but will it help the long-term unemployed upgrade their skills? I doubt it.

As much as politicians want to take credit for lowering the unemployment rate, the truth is that real jobs are created by businesses. Businesses in North America are increasingly moving towards higher-valued products, which means hiring higher-skilled workers. This is obvious by their unemployment rate. The Federal Reserve has influence in the financing costs of companies, no doubt, but again, the structural issues are still prevalent.

Looking at the government’s own data, one area that has seen consistent job growth and is a high-paying sector is professional and technical services. This includes the computer systems sector, along with management and technical consulting. I would argue that since the unemployment rate is so low in the higher-educated parts of our society, the job gains would be significantly higher, but the companies simply can’t find enough people who are qualified. A recent example of the differences in the sector unemployment rate, an article from Bloomberg discussed how firms in Michigan are desperately looking for engineers, with pay of $80,000–$120,000. While many uneducated Americans have been unemployed for over a year, some engineers are getting multiple job offers—and in days. In fact, the huge shortage of skilled workers is actually preventing companies and the economy from growing.

The Federal Reserve has done as much as it can do to help lower the unemployment rate, but it’s now up to the politicians to set up a strategic initiative to re-educate millions of Americans. Personally, I’m not in favor of a government-run job education program, as these rarely are effective at matching the demand from industries. I prefer more of a company-led initiative with subsidies from the government to encourage the training and education of potential employees. This could be part of an apprenticeship program with schooling, the costs being offset with tax reductions and other methods of subsidizing and encouraging this type of endeavor. Either way, the Federal Reserve cannot force someone to go back to school and increase their skill level, even though that is the only way to lower the unemployment rate.