07 February 2011

Education and Unemployment

Is Cyclical Unemployment Mostly A Function Of An Underskilled Work Force?

It is widely known and irrefutable that unemployment is higher among those who have less education. Does it follow that an insufficiently educated rank and file labor force is an important cause of unemployment rates overall? I'm not sure that this follows.

The vexing point is education is to a great extent a way for employers in the economy to sort the workforce. Often, an employer will prefer an employee with more education, on the grounds that it is an indicator of greater general purpose workplace fitness, even when nothing learned during the course of that education is relevant to the job.

To the extent that education is used by employers, on average, as a sorting tool, we expect education to reduce unemployment simply because employers in an employer's market will prefer to hire more educated workers and the lay off less educated workers.

If formal education was the secret to employment, one would expect low education immigrant populations to have the highest unemployment rates, but that isn't the case. The highest unemployment rates are found in native born people with poor educations, not immigrant populations where the relationship between the kind of people sorted into reasonable levels of education in the U.S. and the education levels obtained in their home countries are quite different.

Also, the way that unemployment is defined masks a related problem in more educated workers, which is underemployment. For example, large law firms laid off about 12,000 lawyers in 2009, all of whom had graduate educations and many of whom had spent years on the job developing sophisticated specialty practices. When the market no longer needed lawyers, many of these laid off lawyers would still be able to carry out white collar jobs - perhaps as video store assistant managers, or self-employed divorce lawyers with small case loads, or substitute teachers, and others might decide that this is the time for them to leave the workforce and get more education or have children. But, a measure that looks only at unemployment would greatly understate the economic impact of the lawyer layoffs on lawyers and conclude based upon the low unemployment rates for lawyers that a legal education was somethign that the economy greatly valued in 2009.

While there are some "unemployable" people in the economy, this isn't what is going on when the nation experiences high levels of unemployment in the ordinary course of the business cycle. The vast majority of the people who are unemployed on the day that I write this post (when the unemployment rate nationally is about 9%), have been gainfully employed in a functional way within the last three years, or have been functional participants in educational institutions within the last three years. They don't have jobs not because they are incapable of doing jobs, but because their efforts at their old jobs, while competent, were being directed towards doing things that the economy didn't need, like building more houses in Florida and California and Nevada and providing for the economic needs of people who were doing so. The people who are unemployed during a period of business cycle driven high unemployment are more functional and more skilled unemployed people than those in any other part of the business cycle.

Job Creation As A Function Of Elite Skill Sets

While at the individual level, education of the rank and file workforce is an asset, at the macroeconomic level, it may be that the group whose education matters most is not the education of the ordinary worker, but the education of the economy's elites.

The idea is motivated mostly by two things.

First, my view that unemployment is fundamentally a failure of entrapreneurship. It happens when there is a shortage of executed ideas to find worthwhile things for idle workers to do. The vast majority of the labor force isn't in the business of creating jobs, it is in the business of doing jobs. But, an entrapreneurial elite does create jobs and unemployment is a product of their failure to meet the challenges they face at a certain moment in the economy. Unemployment is about a failure to mobilize ideal resources. There is not a fixed number of jobs in the economy, and there are very few people whose talents can't be put to productive use.

The problem is not that they were doing a poor job at their old jobs, or that they are unqualified to do whatever new job might be created in the near future, but that an entrapreneurial elite has failed to figure out profitable things for them to do.

Car companies don't lose market share and have to lay off the employees whose jobs are lost because of declining market share (as opposed to offshoring) because the employees have collectively done a bad job of building cars. They lose market share because the design engineers, quality control engineers, marketing campaign managers, and senior executives in the company have failed to do their jobs as well as their counterparts in competing firms. When American automobile companies lay off workers and shutter factories at the same time that foreign automobile companies are hiring workers and opening factories in the United States, it is poor leadership by elites in the American automobile companies that is killing the jobs, not an uneducated workforce or excessive regulation or anything else of the kind.

Unemployment happens because the lassiez faire economy has become disorganized.

Second, it is motivated mostly by anecdotal evidence. Good management, leadership even, and a clear vision of how some job creating or economy enhancing institution is works, can have immense effects. Some of the examples that come to mind follow.

* Consider, Tumaini University. It is a private college in Tanzania sponsored by the Lutheran Church (the first private college in Tanzania), which some of my relatives played a significant part in establishing. The lay missionaries that helped build this institution that educates thousands of Tanzanians and employs many people received some outside funding, but the real asset that the church brought to the project was leadership, organization and expertise. Students made their own bricks and helped build college buildings with their own hands (something not so different from the early days of my alma mater, Oberlin College, when it earned its "Learning and Labor" motto starting in the 1830s). Vibrant local congregations provided a great deal of the resources of money and labor to make it work. But, those resources couldn't be put to work until someone who knew how a private university was supposed to work and knew what was involved in managing a long, complex project through all the steps necessary to get from here to there, knew when outside guidance was needed and where to get it, and knew how to establish an organizational culture that was free of corruption in the university's administration came along to guide and crystalize those resources into a large and worthwhile undertaking. A very small number of individuals with those talents and a very modest amount of funding and materials, made possible a big project that will educated large numbers of people for decades or centuries and create countless jobs, both directly, and indirectly through jobs created by graduates who will learn both skills in the classroom, and will absorb through osmosis the way a large bureacratic private entity that runs smoothly works.

* Consider the Port of Haiti when it was run for a brief period by outside American contractors (probably Halliburton, but I could be mistaken). All the rank and file employees were the same. But, a very small managerial group who knew how to do that job and were free of the institutional culture of corruption that had reigned before they arrived dramatically increased the productivity and efficiency of the Port.

* I've seen the exceptional talents that entrapreneurs whom I've represented who take an idea from start up businesses to medium sized ventures that employ a dozen or more people exhibit. While something on the order of sixteen million people, about one in six members of the labor force, are self-employed, the percentage of those people who every managed to establish or run medium to large sized businesses that employ lots of people is very small. The vast majority of self-employed people employ only themselves and perhaps a few other people.

* Consider job creation in immigrant communities, where someone in a first wave of early immigrants develop a business model, perhaps Chinese restaurants or laundries, perhaps Mexican subcontracting firms, perhaps Korean wig shops, that works and then later waves of immigrants follow that model and create large numbers of jobs from the clear vision of how to make it work created by the founder. This isn't restricted to immigrant communities of course. For example, the California style burrito vendor and the expresso shop have both been widely imitated by others who created many jobs in the process.

* Consider the economic collapse that followed fast track land reform in Zimbabwe, because the newly installed farmers didn't know enough about how to carry on the agribusinesses that had previously been run by mostly white plantation style farmers:

Before 2000 land-owning farmers, mostly white, had large tracts of land and utilized economies of scale to raise capital, borrow money when necessary, and purchase modern mechanized farm equipment to increase productivity on their land. As the primary beneficiaries of the land reform were members of the Government and their families, despite the fact that most had no experience in running a farm, the drop in total farm output has been tremendous and has even produced starvation and famine, according to aid agencies. Mostly crops for export have suffered severely, e.g. Zimbabwe was the world's 6th largest producers of Tobacco in 2001. It produces nowadays less than 1/3 of the amount produced in 2000, the lowest amount in 50 years. Zimbabwe was once so rich in agricultural produce that it was dubbed the "bread basket" of Southern Africa, while it is now struggling to feed its own population. About 45 percent of the population is considered malnourished.

The problem is not that black Zimbabweans can't run productive farms. I would have done no better than any of the beneficiaries of land reform. The problem is that the people who were given land to farm didn't have the skill set at the time to do it. A small managerial elite did have those talents and that knowledge was one component necessary to create a productive agricultural system in Zimbabwe, and removing the elite before a new one had been trained, had led to the collapse of the entire system.

* Consider franchises and branch stores of successful retail and service businesses. Once on person establishes a working business model, many others follow on to implement that proven business model and they in turn hire may people for their local operations.

* One of the persistant tropes of fairy tales and fantasy, because it has a certain residual nugget of truth to it, is of a erstwhile prince or princess down on his or her luck turning a dismal home into a place worth living, or organizing a lot of local people into a mass movement that gets something done. Call it the "community organizing" of President Obama's youth, or pull this concept out of a handbook on how to run a counterinsurgency campaign, the idea is the same. Even "The Lord of the Flies" extols the immense impact of a cohesive group of people who can organize themselves. World War II POW Camp narratives relate the way that the British more swiftly self-organized and became a functioning whole relative to American POWs who had trouble reaching consensus around leadership and authority within their POW community.

* My strong suspicion is that one of the main reasons that the Islamic Empire swept most of the known world around 700 CE so quickly is that the new system it created organized communities that had previously been disorganized, and by doing so, made them more functional. Christianity in Africa, mostly off the radar screen of American journalists, is doing something very similar today.

* One of the classic ways to end employment is to start a war. This works for two reasons. First, it creates a vision with all sorts of worthwhile things that need to be done. Second, it creates an end that is declared by fiat to be worthwhile.

* The habit of fitting workers to worthwhile tasks that the military develops can carry over into peacetime. This habit probably plays a large part in the pivotal role played by militaries in undeveloped economies from Egypt to China in the non-military economy.

* As noted in a biography of Dan Quayle, who made job training legislation his signature issue in Congress before he was tapped to be Vice President, no job training program ever implimented by Congress has worked very well. This makes a great deal of sense if entrapreneurial job creation failures by that elite, rather than a lack of job skills in the labor force, is the main culprit in unemployment.

* This fits the heuristics about idea exchange that are used to explain why economic productivity is exponentially related to urban population scale, and why some communities that are open to new ideas (like Boulder and San Francisco) over perform other communities given their scale. Richard Florida's work on localized economic development leads to similar conclusions. Idea exchange among elites in large, perhaps shallow networks is critical to economic growth. Economic growth happens better in communities where relationship networks look more like Facebook networks and less like tight knit, high social capital villages of the kind identified by Putnam.

* Consider that most of the most obvious things that separate Third World living from life in the developed world are carried out in the United States by non-partisan local government officials according to best practices that are mostly so uncontroversial that they never become a subject of political debate in the United States: good water and sewer services, regular trash collection, paved local roads, traffic laws that are routinely followed, widespread K-12 education, building codes enforced by non-corrupt building inspectors, property and sales taxes that are collected by non-corrupt local officials, police forces that are mostly not engaged in any political conspiracy more grand than to arrest criminals and maintain order. Indeed, real estate developers routinely put together new communities in "virgin territory" on these same principles every day and there are tens of thousand of professional city managers in the country (as well as many amateur local elected officials) who make them run smoothly. Many of the residents of these communities aren't exceptional in any way, and indeed, many of the elected officals charged with running these communities wouldn't know how to run them, but do know that one hires a city manager and that it gets done. The clear vision of the people establishing these municipal services held by a very small elite reproduces a modern functioning version of American society in first world style.

* Governor Hickenlooper, like most Governors interested in economic development, has rightly focused his short term job creation efforts on tapping the skills of highly talented retired or semi-retired corporate managers in Colorado who have created jobs before and know how to do it and are interested in contributing to the economy of their new home state. His intuition is right, because the highly networked, highly skilled people who make connections that other people failed to, in ideas and in people, are the ones who create most jobs. Jobs need boosters and entrapreneurs to be created.

Job creation is the process of finding something worthwhile that people in the labor force can do and then repeating it rapidly until it stops working. The people up come up with those business models create vast numbers of jobs, many of which they will never receive credit for creating. A few good ideas can create thousand or even hundreds of thosuands of jobs.

The skill set involved in creating these jobs is only partially academic. Even business school, either at the undergraduate level or the MBA level, doesn't fully capture what is necessary to be a prolific job creator. It also takes large personal networks, strong people skills, and the mix of skill and good fortune needed to identify ways to monetize worthwhile things that can be done with available labor (I say monetize rather than finance, because borrowing money or raising capital is a distinct issue from development a business model that turns meaningful work into business revenue.) And, more than any of these things, it takes a clear vision of what needs to be done that is true. A clear, valid vision of a way to make an enterprise work is more important than anything else in creating jobs.


One key implication of a theory of unemployment that focuses on the skill sets of entrapreneurs rather than the skill sets of rank and file workers, is that it dramatically shifts the natural conclusions about what kind of educational efforts are necessary to reduce unemployment. If a failure to perform on the part of elite is the problem, then doing a better job of providing them with what they need to make the economy thrive and create jobs matters more than training for rank and file members of the labor force, particularly those rank and file members of the labor force who were perfectly functional employees before an economic downturn hit.

There may indeed be individual skill gaps, but this is probably a fairly small part of the problem -- functional employees in one job setting can usually work at a job of comparable responsibility in another job setting in a different industry with only modest on the job training. There may be some technical skills that are in short supply, but my sense is that this is rarely the big bottleneck. Often, when there is a shortage of properly licensed and certified workers, the problem is more one of loosening barriers to entry so that people who can actually do the work are allowed to do so than a lack of actual ability. Similarly, in the tech boom the computer industry routinely hired people with the right computer skills before they graduated from college, because the demand was so great, even though jobs of that level of sophistication are usually reserved for college graduates in sectors of the economy that aren't growing so fast.

Another implication is that the biggest part of a government response to unemployment may be to inject organization into the economy by finding worthwhile things for unemployed people to do until the private sector can come up with something better. No government worth its salt can't find something it wouldn't like to do, and since it has to pay the unemployed something whether they work or not (not only unemployment benefits but a wide variety of other benefits), why shouldn't it use those resources to directly hire people to do things that are worth doing? As long as the pay is not so high in "make work" jobs that it drives up labor prices to high for when the private sector can find work to do, this shouldn't harm a recovery and prevents waste caused by a massively idle labor force.

A third implication of this analysis is that is greatly recasts the role of immigration in employment. A lot of immigration rather than filling some fixed quanity of jobs in the economy, creates jobs by bringing in entrapreneurial individuals who know how to creat jobs. In times of cyclical downturns in employment it makes particular sense to engage in an active policy of brain drain calculated to bring elite potential job creators to the U.S., rather than closing the doors on the grounds that the U.S. needs to reserve jobs for its own workers. Jobs are created by exceptional individuals, and people who are willing to cast aside the culture and world they grew up in, in order to make a better economic life for themselves disproportionately have the drive and visions that it takes to create jobs, and will tend to return home discouraged if they don't.

Unanswered Questions

This view of unemployment comes with unanswered questions. Why do entrapreneurs fail to come up with worthwhile things to do that they can monetize when the economy goes into recession? What are they missing? How can you measure that failure? What distinguishes someone who is capable of prolifically creating jobs from someone who is capable of filling a job competently but not likely to create one? What kind of stimulus fosters more connection making and creates a better climate for implementing entrapreneurial visions? How do you get people to change gears? Can economic indicators better tailored to capture this critical job creating component of the economy help us better understand unemployment?

Still, you can't get the right answers until you ask the right questions, and I am convinced that most people thinking about the issue of unemployment in politics and mainstream economics and the media are not asking the right questions.


Michael Malak said...

Why do entrapreneurs fail to come up with worthwhile things to do that they can monetize when the economy goes into recession? What are they missing?

Capital (because banks stop lending or stop lending at low interest rates), affordable commercial real estate (because owners prefer to ride out the recession), and an available market (because potential customers lack discretionary income for something new).

What distinguishes someone who is capable of prolifically creating jobs from someone who is capable of filling a job competently but not likely to create one?

I see what you're getting at but it's still an odd question in a capitalistic society. Business success it typically measured by how many jobs get destroyed not created -- i.e. by increasing "productivity".

What kind of stimulus fosters more connection making and creates a better climate for implementing entrapreneurial visions?

Reducing government spending. The best thing that happened to the economy in recent memory is when Clinton eviscerated the U.S. military and the high-tech workers from the defense industry switched to the Internet industry.

Reducing government regulation of business. The reduced regulation of medical marijuana has proven to be a boon to commercial real estate in Denver.

Andrew Oh-Willeke said...

I don't think that either capital or affordable commercial real estate are important factors. Business cash on hand has been at record highs and business demand for loans has fallen. Yes, there has been some impact from tightened lending standards and flight to safety in VC investment (particularly in biotech), but I don't think that this is one of the bigger reasons. And, since interest rates are low, even if small business can't raise funds, big businesses can and cheaply (intrapreneurs). If anything commercial real estate prices have fallen and there is room to bargain with high vacancy rates. Lack of discretionary income in the market may be the main factor of those three that is at work.

Maybe we need to redefine business success.

The empirical evidence is firmly against you on the "reducing government spending" point. The opposite is true. Increased government spending is good for job creation. You can have your own opinions, but not your own facts. In part, government spending is helpful because it increases the available market by giiving more people discretionary income.

Government regulation of business, in the abstract, is far overrated as a barrier. Which regulations are getting in the way? Utility companies, which bear the most expensive regulatory burden by far (the CBO estimates about two-thirds of the total) are not laying people off - indeed they are making investments in environmental tech and plant upgrades at a time when new tangible business property investment is in the duldrums.

Also, medical marijuana as a reduction in government regulation of business is an odd example. It is turned an illegal but also completely unregulated business into a massively regulated business. It is the only group of small business people begging to be taxed, to have to obtain licenses, to have to prepare compliance reports, and to have a massive new set of regulations enacted to govern their business (with helps of bureaucracy and lawyer work all around).

Dave Barnes said...

"One of the classic ways to end employment is to start a war."
Yes, because your surplus labor is sent to the front to die.

Anonymous said...

Talk to someone in Denver who recently opened a bar or restaurant.

Then we can talk about excessive regulatory costs.

Government spending, per se, is not a problem. It is the amount of spending compared to income and what the money is spent on.

"stimulus" that allows the continuation of unsustainable hiring, salaries, and benefits in the public is very different from long term investment.

Did you see the recent report about how many Colorado damns need repair? Have you noticed our crumbling infrastructure?

Spending money on those things is what the government is for. Instead we get the Wellington Webb office building filled with bureaucrats, who we cannot fire because every mention of staff reductions brings out cries of "teachers" and "policemen".