Unemployed? This Might Explain Why

Many people struggle to comprehend gross domestic product, seasonally adjusted factory orders, and LIBOR. But the unemployment rate makes sense to everybody. It's simple: when you want a job but can't find one, you're a member of the unemployed -- a nice, clean, percentage number reported monthly by the Bureau of Labor Statistics.

But the reported number can be misleading if you're using it to compare it to your personal circumstances. It's the average unemployment rate in a nation where inequality, for better or worse, runs rampant.

For most of the past year, the reported unemployment rate has fluctuated between 9%-10%. But broken out by different demographics, you'll see how skewed the average is:

Category

Unemployment Rate*

Age 45+, college graduate

4.3%

Ages 25-44, college graduate

4.3%

Age 45+, high school graduate

6.8%

Ages 15-24, college graduate

8.4%

Ages 25-44, high school graduate

9.3%

Age 45+, no high school degree

11.2%

Ages 15-24, high school graduate

14.7%

Ages 25-44, no high school degree

15.7%

Ages 15-24, no high school degree

26.6%

*12-month average ending Sep. '09.
Source: Bureau of Labor Statistics, New York Times.

For the young and uneducated, this truly is a depression. For the older and the educated, it's not so bad.

Breaking these numbers up by sex shows an even larger gulf. For women age 45 and over with a college degree, the unemployment rate was 4.1%. For males aged 15-24 with no high school degree, it's 28.4%. For some demographic groups, today's "terrible economy" is more fertile than it was during the boom years for other groups. There's a faceful of relativity for you.

Selling yourself to The Man
The causes of this are fairly obvious. Adam Smith's framework for economic prosperity is based on the specialization of labor, and young, uneducated workers typically aren't specialized in much of anything. More importantly, they're easier and cheaper to rehire and retrain, which makes them easier to let go when tough times hit. You can probably hire a new dishwasher by the end of the day, and he'll be just as good as the guy you let go last month. But if you need a software engineer with a specialization in aerospace technology, that's another story. Once you hire him, you're going to want to keep him around even when a recession makes doing so painful.

There are two other main reasons young, uneducated workers suffer the brunt of unemployment:

1) The death of manufacturing
For decades, the economy has been shifting away from manufacturing toward information technology, health care, and financial services. In 1947, manufacturing accounted for 26% of GDP; in 2009, it was just 11%. Over the same period, financial services grew from 10% to 21%.

That's shifted the employment demand toward educated workers. (While financial-sector workers are typically an educated bunch, the sad truth is they can inflict more damage and fail to add as much value as the manufacturing sector, where education is generally less relevant.) This isn't only true for manufacturing, but most industries that rely on fairly low-cost, uneducated labor. Think about it: Citigroup (NYSE: C  ) and Oracle (Nasdaq: ORCL  ) are hiring, while retail is still a holy mess.

Manufacturing by nature is also more susceptible to being smacked by recessions. As a 2004 report by the Department of Commerce found, "Of the eight recessions since 1950, real GDP has declined, on average, about 2 percent, whereas manufacturing output has declined 7 percent."

2) The collapse of the building industry
This recession's impetus was the collapse of the real estate bubble. That's wreaked particular havoc on those whose livelihood touched the building industry. And from construction workers at KB Homes (NYSE: KBH  ) to cashiers at Home Depot (NYSE: HD  ) , this industry is dominated by a relatively young and uneducated workforce. (There are of course exceptions: architects, engineers, etc.) It's no coincidence that Nevada -- ground zero for housing armageddon -- now has the nation's highest unemployment rate.

Saved by the bell
The good news is that most people aren't oblivious to this reality. Demand for higher education has gone through the roof since the recession began. Freshman college enrollment grew by 6% in 2008, the largest jump in 40 years. For-profit education companies like Apollo Group (Nasdaq: APOL  ) and Career Education (Nasdaq: CECO  ) have been remarkably successful over the past decade as enrollment surged. If you're young and jobless, increasing your marketable skills through education is probably the single best way to defeat unemployment.

On that note, Bob Wise, president of the Alliance for Excellent Education, gets the last word: "[T]he best economic stimulus is a high school diploma."

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Apollo and Home Depot are Motley Fool Inside Value recommendations. The Fool owns shares of Oracle, and has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 29, 2010, at 2:57 PM, whereaminow wrote:

    Let's imagine that Motley Fool Investment Adviser was ordered by government to raise its price by 40% over a two year period. Then, imagine that they hired Morgan Housel to investigate why the Adviser had sharply declined in readership. Finally, imagine that he returned with a well articulated article that did not even mention the mandated price hike.

    Do you think that his bosses would be impressed?

    So why do you think I would be impressed about an article on high unemployment of young people that fails to mention the 40% price rise in their cost of labor over the past two years - the minimum wage?

    David in Qatar

  • Report this Comment On June 29, 2010, at 3:02 PM, TMFHousel wrote:

    Ah! You got me David. I had a great Milton Friedman quote on minimum wage all lined up, but canned it to save space. I felt the other factors were more meaningful, but you're absolutely right.

    Here's Milton's talk on minimum wage:

    http://www.youtube.com/watch?v=ca8Z__o52sk

  • Report this Comment On June 29, 2010, at 3:07 PM, outoffocus wrote:

    Good article. The irony is if someone is young and uneducated, they are not likely to read an article like this.

  • Report this Comment On June 29, 2010, at 3:08 PM, whereaminow wrote:

    Morgan,

    You're always fair with me. That's why i like you! The other factors are important as well, like you said.

    Btw, I'm not totally certain that a dramatic rise in college attendance is a long run benefit. On the negative side, it's watering down the value of a degree. Also, with tuition prices rising steadily for 50 years, this is sure to keep them up and up at a time when higher education costs need to come down.

    Just a thought.

    Thanks for the Friedman clip. He's always wonderful to listen to!

    David in Qatar

  • Report this Comment On June 29, 2010, at 9:18 PM, MMTInvestor wrote:

    @Whereaminow/David:

    On the other hand, if the costs of higher ed come down dramatically, then more people will have access to a college education, thus raising national attendance levels and further decreasing the value of a degree. Of course, there may be ways of both making education more affordable and more restricted, but that would probably require dramatically raising entrance and retention standards (hopefully partly increasing the value of a degree).

    Just my two cents. Let me know if/where I'm wrong.

    Cheers,

    Scott F.

  • Report this Comment On June 30, 2010, at 12:01 AM, whereaminow wrote:

    HI Scott,

    It would initially appear that an increase in students would lead to a drop in tuition costs, but that has not been the case. The main reason is that the majority of the money flowing into higher education is done through borrowing and federal assistance. Overwhelmingly, the government pays for people to go to college, distorting the price structure of education. Because of this, universities have no need to cut costs or improve the quality of their product.

    This will never be fixed until people reject the false idea that education is a "right" and a "public good."

    David in Qatar

  • Report this Comment On June 30, 2010, at 3:25 PM, Borbality wrote:

    Cool info, but I have to wonder how many 15-year-olds are expected to work. These days it's common for kids to live with their parents into their twenties and not have a driver's license, let alone full-time jobs.

  • Report this Comment On July 01, 2010, at 7:32 PM, Alwayzwrong wrote:

    David is correct; there is an inverse relationship between the minimum wage and employment, ultimately leading to a greater supply of workers than demand for their services. David is also correct regarding tuition. The availability of student loans is one of the primary drivers of tuition increases.

    Glad to see someone paid attention in their priniciples of economics course. Too bad, I had to go to Qatar to find someone who did!

  • Report this Comment On July 02, 2010, at 8:15 AM, ragedmaximus wrote:

    does anybody think that the 1 million unemployed that recently lost benefit extension thus being lopped off the unemployment rate by bs red tape effect todays jobs number report????????????? conspiracy???????????????????????/////

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