EconTalk with Rocky: Illinois’s Budget Deficit and Unemployment

A recent Crain’s article, citing research by a U of I prof, suggested that much of our tax revenue shortfall can be explained by persistent job loss over the last decade. In 2000, Illinois had its lowest unemployment rate on record, 4.5%.  Our current unemployment rate is hovering around 11%. This begs the obvious question, where did the jobs go? The simple answer would be to blame the recession. But if you dig a little deeper and look at the types of jobs that have been lost, you can see that Illinois might have a bigger problem.

The cause of unemployment is generally broken down by economists into three categories:

1. Unemployed by choice–Say if you were between jobs or left a job to start your own business

2. Cyclical–Unemployment caused by a business cycle recession, i.e. a period of low aggregate demand

3. Structural–Unemployment as a result of a lack of demanded skills, most likely because of technological innovation

Illinois has lost about 390,000 jobs since 2000. Nearly three-quarters of those jobs were in manufacturing. The remainder is in service industries like construction.

What does this mean? Certainly some of those manufacturing jobs have been lost because of the recession and will return as the economy recovers, but a large proportion won’t come back because they are no longer in demand. While some of those skills maybe transferable to other jobs, others will not and they will persistently struggle to re-enter the labor market.

Obviously this is a simple analysis, but in a period where difficult budget choices have to be made by policymakers, it seems that a focus on education and skill development opportunities would make a significant difference in our short- and long-term fiscal health.

Clearly this won’t solve all our long-term budget problems as we have still have to deal with pensions and the stickiness of wages (I’m lookin’ at you, Unions) . But I’ll save that for another post.