Unemployment and Education

by Russ Roberts on March 17, 2009

in Work

From Edward Glaeser in the New York Times:

Despite the abundance of front-page stories with headlines like “Ivy
League financier is now unemployed and homeless,” unemployment is
remarkably concentrated among the least-educated Americans. Today, the
seasonally unadjusted numbers show that 15.1 percent of high school
dropouts are unemployed; the comparable number for college graduates is
4.2 percent.

Yet despite the city’s many less-well-educated workers, and even
though this recession was supposed to decimate Wall Street, New York
has, so far, gotten through it with relatively little unemployment. As
of January, the city’s unemployment rate was 6.9 percent while the
national rate was 7.6 percent. The epicenters of the current recession
are California and Michigan, where the state unemployment rates are already in double digits. Nine California metropolitan areas have unemployment rates above 12 percent.

Glaeser gives a number of possible explanations for why New York's unemployment rate is so low. I am drawn to this one:

  • Hypothesis #3: It’s All About Building. The United States has gone from building more than two million new homes a year in 2006 to a current rate of about 531,000 homes a year.
    The decline in the number of new homes doesn’t mean just a reduction in
    building jobs, but also a big hit to the retail sector that supplies
    furniture and appliances for new homes.

    Unsurprisingly, therefore, unemployment today is particularly
    focused in those parts of the country that were growing spectacularly
    before the crash. Nevada’s unemployment rate is now 9.4 percent;
    Riverside-San Bernardino’s unemployment rate is 10.1 percent. As New
    York City has been growing at a slower rate than the nation for 50 years, New York City’s construction industry was only about 3.3 percent of total employment. The 10 percent decline in construction just hasn’t hurt the city all that much.

This would also explain why the unemployment rate is so high for high school dropouts and so low for college grads. Not that many college grads are in construction. BTW, for high school grads without any college, the national unemployment rate is 9.6%.

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John V March 17, 2009 at 2:13 pm

Very good points.

Aggregates and averages serve some purpose in certain applications…however…when looking at national unemployment, it's much more illuminating to dissect the numbers by region and demographics. When we do that, we get a better idea of what lies beneath the generalized stats.

Ironman March 17, 2009 at 2:14 pm

Don't forget anything tied to automobile production these days as well – along with construction, job losses in these two fields that don't require college degrees account for much of the increase in unemployment from two years ago.

Martin Brock March 17, 2009 at 3:40 pm

I buy the explanation, but it also helps that much of the "stimulus" money flows out of New York like water from an open hydrant before trickling down to the rest of U.S.

John Dewey March 17, 2009 at 4:29 pm

I agree with the construction hypothesis, but I think there is also a case for Hypothesis #1, Cities are great

Big cities mean big revenue. Big revenue enables economies of scale in production and operations. The sheer size of the market offsets higher unit labor costs and rent.

Southwest Airlines is jumping to add flights at LaGuardia even while cutting its overall capacity 4%. Why? Because the potential revenue and profit from LaGuardia to anywhere is much greater than that from Phoenix to Birmingham or Nashville to Seattle. So Southwest will redeploy parts of its workforce from smaller, less profitable markets to New York. And hire New York construction firms to finish out its newly acquired gates. And board its pilots and flight attendants in New York hotels rather than Nashville hotels.

Big city gains. Smaller cities lose.

MikeS March 17, 2009 at 9:01 pm

I'm wondering, then, if this justifies "stimulus" spending, by replacing lost home construction jobs with road construction jobs. Thoughts?

Martin Brock March 17, 2009 at 9:38 pm

I'm wondering, then, if this justifies "stimulus" spending, by replacing lost home construction jobs with road construction jobs. Thoughts?

That's the theory. Reemploy these people doing something else, hopefully something useful, until we balance the books and absorb the excess housing, thus sustaining monetary demand for all sorts of other goods, so that people making mp3 players don't become unemployed along with the home construction workers while the economy seeks a new equilibrium.

Maybe we built too many houses for everyone to absorb, even with everyone employed, but maybe we weren't making too many many mp3 players, until the people building too many houses had to stop, having built too many already.

Why disrupt organizations of mp3 player makers while the home building resources reorganize when the reorganized construction workers will still demand mp3 players once they're reemployed?

I don't favor the central planning approach. I do understand the theory behind it.

alexis america March 18, 2009 at 5:19 am

Most people find that every penny they spent in a community college was a penny well spent. There are however, ways in which you can greatly reduce your overall expenses when it comes to getting your college degree. T

geoih March 18, 2009 at 9:52 am

Quote from John Dewey: "Big cities mean big revenue."

You mean like Detroit?

I think there needs to be more talk about dis-economies of scale. When does the division of information adversely impact the division of labor and cancel out economies of scale (e.g., GM, AIG, government, etc.)?

Crusader March 18, 2009 at 1:20 pm

Martin – the reason why we have central planning is because the planners decided that building more houses has a social value, but more MP3 players don't. If shelter is a human right, why not just build more government-subsidized apartments instead of $400K McMansions? Amazing how some people think they have a god-given right to one of those…

John Dewey March 18, 2009 at 6:03 pm

geoih: "You mean like Detroit?"

Of course there is an exception. Detroit, the 11th lagest metro area, is nowhere near as attractive a market as New York, Los Angeles, Chicago, Dallas, and the other larger metro areas.

geoih: "When does the division of information adversely impact the division of labor and cancel out economies of scale?"

Sorry, but I don't understand the meaning of your question. What is "division of information"? It is not an economic concept with which I am familiar.

Please note I am referring to economies of scale, not division of labor.

I do know – from real world engineering and planning work experience – that retail and logistics operations in the largest cities enjoy economies of scale over the same functional operations in medium and smaller cities. Relative to their smaller city counterparts, firms and divisions of firms operating in large cities are able to spread high fixed costs over many more retail outlets, delivery couriers, aircraft departures, service technicians, etc.

geoih March 19, 2009 at 7:42 am

QUote from John Dewey: "What is "division of information"?"

You can only know so much that is relevant, so it's more efficient to focus on what you can know best and leave the rest to somebody else. It's just like labor (i.e., it's more efficient to focus on what you do best).

It's a reason why socialism (i.e., central economic planning by the government) doesn't work. When you reach a certain scale, you can't know enough information to plan efficiently. It happens with all organizations when they get "too" large.

John Dewey March 19, 2009 at 9:39 am

geoih: "It happens with all organizations when they get "too" large."

And you know this to be true for all organizations? Based on what? Your real-world experience?

So how large is "too" large, geoih? as large as Wal-Mart? Exxon? FedEx? Microsoft? McDonald's? Proctor & Gamble?

Economies of scale works very well for these and many other profit-seeking organizations, geoih. Taking advantage of those economies of scale does not imply the ineffective central planning of the type employed by socialist nations. But that's what you seem to be arguing.

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