Last week, a banker asked us a thoughtful question about the relatively low unemployment rate among adult bachelor’s degree holders (25 years and older) we had written about in The New England Journal of Higher Education. Noting that the U.S. Bureau of Labor Statistics (BLS) release this month shows those age 25 or older with a bachelor’s degree have an unemployment rate of 4.5%. he asked, “Could we assume that these 4.5% are structurally or frictionally unemployed, that is, do adult college grads have a full employment rate of unemployment? After all, the full employment unemployment rate for the economy as a whole is generally thought to be around 4.5%.”
We think that the 4.5% unemployment rate for college graduates is not the full employment rate of unemployment. The Beveridge full employment concept was developed during the early post-World War II period and is defined as approximate equality between the number of unemployed workers and vacant jobs at a given point in time. When this occurs, all unemployment represents either structural (skills or geographic mismatches) or frictional (job search unemployment) imbalance between labor supply and demand. Under the Beveridge definition of full employment, there is no unemployment caused by insufficient demand for labor, since there are enough vacant jobs to eliminate all unemployment if the labor market were perfectly efficient. In practice, this means severe labor shortages in high-end labor markets that can coincide with continued albeit modest excess supply in lower-end occupations. Certainly, this is what much of New England looked like in the 1998 to 2000 period when the regional unemployment rate fell below 3%, and severe shortages existed in much of the college labor market, especially in scientific and engineering fields, along with tightening in the health professions at that time (although the shortages in the health fields were to come after 2000)
The Beveridge full employment condition occurs when the national (state or regional) unemployment rate falls to around 2.5% to 3%. At that point, there is a near equality in the number of unemployed workers and vacant jobs.
The common view that the full employment unemployment rate occurs at around 4.5% is based on the NAIRU (non-accelerating inflation rate of unemployment) concept of full employment. NAIRU is defined as that unemployment rate at which efforts at further reductions in unemployment will result in upward wage pressures that increase the inflation rate.
The 4.5% unemployment rate for age 25 and older college grads published by BLS should not be interpreted as an indication of full utilization of these adult college graduates. During 2007, when the overall unemployment rate in the nation was fluctuating between the NAIRU full employment level of 4.4% and 4.7% for most of the year, the unemployment rate for holders of bachelor’s degrees and above aged 25 and older ranged between 1.8% and 2.2%. . So we would argue that the full employment unemployment rate for adult college graduates is around 2%. Unemployment above this level would suggest that some unemployment among these college grads is associated with slack labor demand.
Currently, there are no job vacancy measures nationally that measure job openings by either by education or occupation to see what the balance of vacant jobs and job seekers might be in that labor market segment. A few states do have measures of job vacancies by occupation. In Rhode Island, with an unemployment rate in the 12% range during 2009, we found that in the college labor market occupations, there were more than six experienced unemployed workers for every one vacant job. In Massachusetts, the ratio was closer to 3-to-1, with the state unemployment rate hovering around 9%.
It is important to note that other manifestations of labor market underutilization problems for college grads also increase as the economy shifts away from full employment. Nationally, we find that about 3% of employed college grads are working involuntarily in part-time positions and an additional 2% have withdrawn from the labor force even though they have a job desire and would go to work immediately if a job was available. Adding these shares together with the college grad unemployment rate, we find that about 9.5% of the adjusted college graduate labor force has a labor market problem of some type.
A quick look at newly minted college graduates reveals marked difficulties in finding work in the college labor market. Our analysis of 2009 Current Population Survey data on the labor market experiences of college grads under 25 who were not currently enrolled in school found that while 83% were employed, only two thirds of these recent college grads had college labor market jobs. The remaining one-third worked outside of the college labor market. They were employed in teen labor market jobs or jobs that most often employed high school graduates or those with even fewer years of schooling, frequently in retail trade and low-end service jobs. This means that only about half of new college grads who don’t go on to grad school were employed in a college labor market position.
So the short answer to this great question is that there is plenty of excess labor supply in the college labor market, and few signs of frictional or structural imbalances. Despite all this bad news there are plenty of reasons to think college grads are much better off than everyone else … that’s part of the reason the share of high school graduates going to college last fall was at an all-time high.
Neeta P. Fogg is senior economist at the Center for Labor Market Studies at Northeastern University. Paul E. Harrington is associate director of the center.