Fixes for Unemployment Depend on Whether It’s Cyclical (It Is) or Structural (It Isn’t)

Yesterday I recapped the November employment report. The employment picture remains grim.  The workers depression continues.

As my favorite graph from Calculated Risk shows here, regardless of what happens to the unemployment rate, our recovery from the jobs lost in the recession is incredibly slow.  At the pace we have been on for the last 2-3 years, we won’t recover the jobs lost in the recession until around 2018 – a full lost decade.

Thanks partly to the #OccupyWallStreet movement, these 14 million unemployed aren’t so invisible as they seemed last summer when the policy debates were all about debt and deficits.  Since denial of a problem has failed, folks who argue against any attempts by the government to stimulate the economy need a different pitch.

That revised pitch is that the unemployment problem is “structural”, not “cyclical”.  Now before I move on to show the problem is not structural, let me explain the difference. I’ve looked at structural vs. cyclical before here and here, but I’ll summarize.  In economist-talk, “unemployed” means you are part of the labor force but you don’t have a job.  To be part of the labor force, you must be actively looking (“willing and able”) to work.  Those numbers come from government surveys. Economists unofficially classify those unemployed workers according to why they don’t have a  job.  There’s four possibilities:

  1. Frictional – there’s a job for them, they simply haven’t been matched with it yet.
  2. Seasonal – the job will exist again next year when the season is right (think downhill ski instructors in July)
  3. Structural – empty jobs exist but the unemployed workers either don’t have the right skills or aren’t in the right location.  Train the workers or move them and unemployment disappears.
  4. Cyclical – there simply aren’t enough empty jobs for the number of unemployed workers.  If the GDP were larger and spending greater, then jobs would be created and the people put back to work.

For policy reasons we aren’t concerned with frictional or seasonal. Time cures those individual unemployment situations. But if we only had frictional or seasonal unemployment, our unemployment rate would be much, much lower – 4% or even lower.  Clearly we have either have a lot of structural or cyclical or both.

Which we have matters for policy reasons. If unemployment is structural, then we can effectively blame the unemployed for their fate.  They didn’t get the right skills. They chose to live in the wrong place. From a policy standpoint, the government might adopt policies that support re-training but that’s about it.   If, however, unemployment is cyclical, then government has plenty of room to reduce unemployment through stimulus programs, either effective tax cuts and/or increased government direct spending.

Brad Delong points us to David Wessel of The Wall Street Journal who tells us how and why today’s high unemployment is not structural. In other words, we could bring down the unemployment very dramatically and very quickly if we chose to.  Politicians in Washington simply choose not to do so. (bold emphases are mine)

DW:

Untangling Long-Term Unemployment: Herman Cain, the Republican presidential candidate, avoids carefully calibrated talking points. “If you don’t have a job and you’re not rich, blame yourself,” he said in a Wall Street Journal interview.

Beneath Mr. Cain’s blunt words lurks an economic hypothesis: that there’s nothing much government policy can do to bring unemployment down from today’s 9.1% rate…. [I]f the unemployed aren’t willing or able to fill jobs that muscular stimulus might produce then there’s little wisdom in borrowing more money or chancing inflation. We just have to suck it up.

But according to Fed governor Daniel Tarullo, a veteran of the Clinton White House and Obama presidential campaign who has spent the past few months consulting with Fed and other labor economists for a speech on the job market he is to deliver Thursday at Columbia University, there is little evidence that the bulk of today’s unemployed would still be unemployed if the economy were growing faster or that the bulk of today’s unemployment is, in the jargon of economists, “structural.”…

The Labor Department counts 14 million unemployed and 3.1 million job openings, or 4.6 jobless workers per job opening. Before the recession, the ratio was 1.5. If every opening were filled instantly, there would still be many unemployed.

Wages aren’t rising. “We don’t see rapid wage growth almost anywhere, which is what you would expect if firms were bidding up the wages of qualified workers and were unable to find qualified workers among the unemployed,” said Harvard University’s Lawrence Katz.

Unemployment is up across ages, occupations, industries and years of schooling. “We had a fast-advancing economic decline with layoffs and hiring freezes in a broad range of sectors of the economy. That is not consistent with an increase in structural unemployment being the big explanation,” Mr. Tarullo said…

 

5 thoughts on “Fixes for Unemployment Depend on Whether It’s Cyclical (It Is) or Structural (It Isn’t)

  1. Ya know… I agree with you on so many levels… especially on your use of CalculatedRisk’s great graphics :) … but always seem to fall on the other side of the fence.

    Its my sincerest belief that structural debt has grown to the point that it outstrips government’s ability to fight cyclical (or any other type) unemployment with greater deficit spending. I believe we’ve reached the point of diminished returns. The cure is more harmful than the disease.

    Look across the pond at Europe… that’s us in a few years.

    Cain is out of the campaign and should be. It isn’t the affairs that disqualifies him to be President. Its the way he adamantly lied about them that absolutely disqualifies him.

    Putting that aside, I find it disappointing to summarily reject the opinion of a businessman who has run a large company, met payrolls and created jobs in the real world for that of a pure academic and life-long government bureaucrat who has never run so much as a hot dog stand in his life.

  2. I know I have expressed this before, but it is a drum that I can’t stop beating;

    While we may be experiencing a very high level of cyclical unemployment, the extent and SPEED of globalization (outsourcing, telecommuting) has strained the U.S. workers’ ability to compete. It still seems as if there MUST be a significant component of the figures that is structural, not cyclical in nature. Are the aggregate numbers hiding the reality that we are unable to adapt in a rapidly changing world market ?

    The blame is to be laid squarely on the shoulders of our political system (corrupt), policymakers (uneducated), financial institutions (careless, greedy, underregulated), and multinational corporations (overrepresented, undertaxed) NOT on the American worker.

    I guess I’m suggesting that the STRUCTURAL problem is not strictly with the labor market, but rather the ‘system’ that is in place in this country.

    • Darrel,
      I believe there is one componet that is structural which hampers American product to compete; the cost of employer sponsered healthcare.

  3. There’s another possibility here, isn’t there? What if, through technology, we have arrived at a point where society can now produce every last good and service it needs and wants without fully employing every person consuming? I think we are witnessing a fundamental change where we can afford to have a class of people who consume without producing, and still have no shortfall for anyone else.

    The fundamental question that isn’t addressed is why people work. If it’s because we need their labor then we either wouldn’t have high unemployment or else we’d have a shortfall in some good or service that they ought to be producing. On the other hand, if people work solely in order to have money to consume, but full employment would generate an excess that no one needs, then why not just pay some people not to work? We already pay farmers not to plant some of their crops in order to keep the cost of food from crashing. So why not pay some people not to work in order to prevent wages from crashing?

    I think that the future could be a great place if people could stop worrying about work for a while; perhaps they’d spend time studying something they’re interested in, or pursuing a hobby they enjoy, or just work fewer hours for the same pay they were getting before. The whole point of technology and industry, as imagined by Ben Franklin at least, was to allow people to have more time doing what they enjoy, rather than toiling. Why not embrace high unemployment and find ways to make it a feature, rather than a bug, of our technological society?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s