What You Can Blame for This Insane Unemployment

Insane unemployment has remained a thorn in the side of our economy since the financial panic of 2007. Workers and businesses are hurting, it's election season, and conjectures and accusations are being tossed around left and right.

So what's actually to blame?
There are five main alleged culprits for our unemployment mess: unemployment insurance, tax and regulatory uncertainty, credit unavailability, labor skills mismatch, and demand.

The first two theories can be dispatched with fairly easily. My colleague Morgan Housel has already dealt with the notion that we can invert cause and effect and blame unemployment insurance by positing a sudden swelling of laziness: "The Federal Reserve Bank of San Francisco ... crunched the numbers and found that those receiving unemployment benefits only remain unemployed for a bit over a week longer than those who do not."

When you ask small businesses what the biggest problem they face today, just one in five names taxes, about the same proportion as in 2006. Similarly, the proportion of small businesses mostly concerned about regulation is lower today than it was in the 1990s when the economy was doing awesome.

Credit is somewhat drier than it was at the peak of the credit bubble, but not enough to account for 9.6% unemployment.

That leaves a skills mismatch -- the idea that a lot of unemployed aren't well-suited for jobs in other industries -- and the demand concern -- the idea that businesses are laying off workers because of sluggish sales.

Here's Morgan, arguing the skills mismatch perspective:

The financial crisis wasn't a short-term illness, but a symptom of deep structural problems, namely too many businesses that relied on debt and leverage. From carpenters at KB Homes (NYSE: KBH) and Pulte to mortgage bankers at Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C), millions of jobs revolved around a credit Ponzi scheme that's no longer viable. Plenty of these jobs are dead. They're not coming back. Ever. What we're going through is not a classic downturn as much as it is a reconfiguration of the economy -- and that takes a long time to complete.

"The economy" is almost perfectly bifurcated: one part is doing really well, and another is gasping for air.

This makes intuitive sense. At its peak in 2006, the market capitalization of the financial sector made up a ridiculous one-quarter of the value of the entire stock market. Refocusing from the crazy finance and housing bubble go-go days to a much saner economy built around making and doing more useful things is going to be painful for a lot of people.

But Mike Konczal disagrees. He notices that in just about every sector and occupation, underemployment is approximately double the 2000-2007 average, suggesting that the downturn is hitting workers across the board: "This is a story of aggregate demand, not a story of skills mismatch."

So which is it?
First, let's recognize that these theories aren't mutually exclusive. While full-time employment may be more difficult to come by across the economy, construction, leisure and hospitality, and many service jobs were particularly hard-hit. The job hunt will be especially difficult for people whose training and experience is limited to these areas.

But even if a skills mismatch can explain why specific individuals are having particular difficulty getting hired, it can't explain economywide high unemployment. For that, a demand shortage brought about by lost wealth, self-perpetuating unemployment, and timid consumer and capital spending is the only explanation.

All this is totally consistent with the aforementioned small-business survey that showed stable or declining concern about taxes and labor quality amid skyrocketing worries about demand:

Source: National Federation of Independent Business.

There is, however, a sense in which "the economy is bifurcated." To see what's going on, let's take a look at corporate earnings growth. In a normal economy, we'd expect to see a shape vaguely resembling a graceful bell-curve with lots of companies showing small or moderate earnings growth or declines, with fewer names at the extremes showing spectacular fortune or blowups.

That's not how the picture looks today:

Source: Capital IQ, a division of Standard & Poor's. Pre-tax earnings exclude unusual items.

Who's hurting and who's thriving? A lot of the usual bubble suspects are in pain, while most S&P 500 companies in recession-resistant sectors are doing just fine.  

The bottom line isn't that a skills mismatch -- though it may exist -- is responsible for our unemployment woes; rather, many companies' earnings are divorced from the strength of our economy. In some cases, the profit increases are due to genuine recession resistances: Demand for necessities like health care is supposed to hold up well in tough economic times; Gilead (Nasdaq: GILD) (up 99%), which focuses on treatments for life-threatening diseases, is no exception. Corning (NYSE: GLW) (up 54%) derives a bulk of its sales growth from East Asian countries with lower unemployment. Businesses with sticky customers and recurring revenue such as Oracle (Nasdaq: ORCL) (up 48%) and Intuitive Surgical (Nasdaq: ISRG) (up 229%) can hang onto sales even when sales in the rest of the economy are tenuous.

But, on the whole, persistent unemployment is terrible for workers and sales. Last time, our economy was ultimately bailed out by a massive economic stimulus in the form of World War II -- not tax cuts, deregulation, small-business lending, or jobs training. If we continue to blame unemployment on the wrong culprits, we could see the economy muddling along for some time.

Agree, disagree? Let me hear it in the comments box below.