Unemployment Benefits Cut Will Worsen Things.

CalculatedRiskBlog reports:

Here is a depressing report from the National Employment Law Project: States Made Unprecedented Cuts to Unemployment Insurance in 2011

NELP’s new analysis shows that in 2011, six states cut the maximum number of weeks that jobless workers can receive unemployment insurance to less than 26 weeks—a threshold that had served as a standard for all 50 states for more than half a century, until this year. Michigan, Missouri, and South Carolina cut their available weeks down to 20; Arkansas and Illinois cut down to 25; and Florida cut to between 12 and 23 weeks, depending on the state’s unemployment rate. Double-digit unemployment in Michigan, South Carolina, and Florida did not discourage lawmakers there from making the cuts.

… Indiana changed the formula it uses to calculate weekly benefit amounts so that the average unemployment check will drop from $283 to $220 a week.

Ouch.
This makes things worse.  It increases the risk of  another drop in GDP.  See, when people who have been getting unemployment benefits have their benefits cut, they cut their spending.  That means some businesses are selling less stuff. Those businesses in turn layoff more workers, or at best case avoid hiring new ones.
As for the argument that people who get unemployment benefits avoid working just to get the benefits, there’s two responses.  First, even by the micro-economic models and theories so beloved by conservatives, it’s totally irrational to do so.  I mean, do you really believe people pass up opportunities to have $48,000 a year or more (median household income) in order to collect $8,000 (maximum unemployment benefits for 26 weeks)?  No, it’s totally irrational.  Second, cutting unemployment benefits to try to get people to have jobs is essentially punishing the unemployed. If there are no jobs to be had, it makes no difference how much we punish them.  They can’t get a job.  The beatings will continue until morale improves.

America Flatlines – Employment Report for June 2011

The “recovery” is flat-lining. The employment report for June shows the continuing bad news.  I’ll let CalculatedRisk give us the facts:

From the BLS:

Nonfarm payroll employment was essentially unchanged in June (+18,000), and the unemployment rate was little changed at 9.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major private-sector industries changed little over the month. Government employment continued to trend down.

The change in total nonfarm payroll employment for April was revised from +232,000 to +217,000, and the change for May was revised from +54,000 to +25,000.


The unemployment rate increased to 9.2% (red line).

Percent Job Losses During Recessions…graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses. The dotted line is ex-Census hiring.

The current employment recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early ’80s recession with a peak of 10.8 percent was worse).

This was very weak and well below expectations for payroll jobs, and the unemployment rate was higher than expected (both worse). A terrible report.

Although the Wall Street types and other analysts “expected” a better report, this really isn’t surprising. What it shows is the effect of fiscal policy. For over a year now, the actual effect of fiscal policy has been contractionary.  Despite the misleading rhetoric of the Republicans, the Tea Party types, and the President, government spending has not been increasing for at least a year.  The stimulus is over. It was done awhile ago.  And it wasn’t much of a stimulus anyway relative to the scale of the problem.  In fact, the federal government surge in spending in 2009, the so-called “stimulus” wasn’t really a stimulus.  It was an attempt to limit and delay the damage from massive state and local government spending cuts.

You would think that month-after-month of poor employment and job reports like we’ve seen this year would cause somebody in official Washington to be concerned.  You would be wrong.  Instead, the talk is all about how to cut spending further, faster, and deeper.  Apparently 9.2% unemployment rate, no real increase in the number of employed, and 545,000 new unemployed people is just fine and dandy with official Washington.

The Economy Is Stalling – Employment Report for May 2011

First the facts and then my comments.  Calculated Risk Blog reports from the BLS:

From the BLS:

Nonfarm payroll employment changed little (+54,000) in May, and the unemployment rate was essentially unchanged at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains continued in professional and business services, health care, and mining. Employment levels in other major private-sector industries were little changed, and local government employment continued to decline.

The change in total nonfarm payroll employmentfor March was revised from +221,000 to +194,000, and the change for April was revised from +244,000 to +232,000.

The distressing news here isn’t so much the rise in unemployment rate from 8.9% to 9.1%.  Given the margin of error in measurement*, the unemployment rate has essentially been 9% for the last few months.  The distressing part is three fold.  First, the number of net new jobs created was only 54,000.  We need at least 150,000 and closer to 180,000 net new jobs each month to keep pace with population growth.  54,000 is simply not enough.  What’s worse, it’s a very significant drop from the March and April levels with no obvious explanation other than the economy overall is seriously slowing down.

The second distressing item is the revisions to the April and March numbers.  Normally previous months’ numbers are revised as the Bureau gets more and better data.  But revisions typically aren’t very large and may be either up or down.  But to have 12% and 4% downward revisions to the previous two months means the mild optimism folks were expressing two months ago was misplaced.

Finally, the most distressing part news, but totally unsurprising, is that local government employment (think teachers and police) continues to decline and be a significant drag on the economy as state, local, and the national government continue to think they can cut their way to prosperity.  They can’t.  There’s no history or empirical evidence that shows drastically cutting government spending in the middle of a significant slump will bring prosperity.  Quite the contrary, we have extensive theory and evidence that says cutting government spending in the middle of a slump will make the slump worse, make unemployment higher, and actually increase the government’s deficit.

So just how bad is this continuing failure to recover from the Great Recession of 2007-09?  Again Calculated Risk obliges with a great graphic.  This graph compares each official recession since the end of World War II.  It plots the percentage decline in total employment (the loss of jobs!) by month and then shows how long it took to recover employment.  At the rate we are “recovering” (it’s not really a recovery!), it will be many years before we again get back to the employment levels we had when this disaster began to unfold in 2007.  Without major changes in policy direction, we are definitely facing a lost decade for the U.S.

There are a total of 13.9 million Americans unemployed and 6.2 million have been unemployed for more than 6 months. Very grim numbers.

Overall this was a weak report and reminds us that unemployment and underemployment are critical problems in the U.S.

Percent Job Losses During Recessions

Percent Job Losses During RecessionsClick on graph for larger image in graph gallery.

This graph shows the job losses from the start of the employment recession, in percentage terms – this time aligned at the start of the recession. …

In terms of lost payroll jobs, the 2007 recession is by far the worst since WWII.

* for a more detailed explanation of how to read unemployment rate and employment numbers, see these four posts on the Employment Muddle Part I, Part II, Part III, Part IV.

Ruh-Roh Raggie, Trouble On Employment

Well while I’ve been away from posting the last few weeks, things are starting to not look good.  Two months ago I was concerned that the “recovery” was going to proceed at a normal growth rate and effectively close out those already unemployed from employment.  I even have a draft long post about it called “The Invisibles” which I still hope to finish. But recent indicators show the economy may be slowing even further.  We may be approaching “stall speed” where policy controls get sloppy and the whole thing crashes, again.

Today, the weekly report on new unemployment claims was still poor.  I’ll let Calculated Risk explain:

The DOL reports on weekly unemployment insurance claims:

In the week ending May 28, the advance figure for seasonally adjusted initial claims was 422,000, a decrease of 6,000 from the previous week’s revised figure of 428,000. The 4-week moving average was 425,500, a decrease of 14,000 from the previous week’s revised average of 439,500.

The following graph shows the 4-week moving average of weekly claims for the last 40 years.

Weekly Unemployment ClaimsClick on graph for larger image in graph gallery.

The dashed line on the graph is the current 4-week average. The four-week average of weeklyunemployment claims decreased this week to 425,500.

This is the eight straight week with initial claims above 400,000, and the 4-week average is at about the same the level as in January when there were fewer payroll jobs being added.

This is a notoriously “noisy” data series, meaning it’s highly volatile and jumps around a lot.  But after 8 straight weeks at the elevated 400,000+ level, we can conclude it’s not just noise.  There’s a signal here.  Layoffs are resuming.

Yesterday’s ADP private payrolls estimate was also very weak.  Again Calculated Risk:

ADP reports:

Employment in the nonfarm private business sector rose 38,000 from April to May on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from March 2011 to April 2011 was revised down slightly to 177,000 from the previously reported increase of 179,000.

May’s ADP Report estimates employment in the service-providing sector rose by 48,000, marking 17 consecutive months of employment gains while employment in the goods-producing sector fell 10,000 following six months of increases.Manufacturing employment fell 9,000 in May following seven consecutive monthly gains.

Note: ADP is private nonfarm employment only (no government jobs).

This was well below the consensus forecast of an increase of 178,000 private sector jobs in May.

This doesn’t bode well for tomorrow’s official May employment situation report.  For more background on what these stats mean, see my series from February here, here, here, and here.

In Michigan, Governor Snyder Is Increasing Unemployment

For years and through the early part of the Great Recession of 2007-09, Michigan was ground zero for unemployment. Unemployment rates of around 15% – worst in the nation.  But once the GM and Chrysler completed their bankruptcies, it has begun to emerge. In the past 12 months Michigan has made relatively good progress on it’s unemployment problem.  In fact, it’s made the most progress of any state (a low bar, I know) while some states like Nevada and California and two other states are worse.  To the extent a governor is responsible for unemployment in the state, this must be accredited to Jennifer Granholm who left office in January 2011.

The new governor, Rick Snyder, came in full of Republican talk and promise of “creating good jobs”.  He’s been extremely vague about this happens other than to wave the magic business tax-cut genie.  Apparently, according to Snyder, if we simple cut business taxes by raising taxes on seniors and poor people, then the jobs will just happen.  Now there’s plenty of evidence indicating this idea simply doesn’t work.  Taxes are not the major reason why businesses are where they are.  More importantly, no business ever said “hey, my taxes were cut so I’ll be a good citizen and hire somebody”.  What real businesses do is they say “hey, there’s demand for my product, I better hire somebody”.

Unfortunately Snyder is not content to simply cut business taxes.  He has to tinker with a proven job-creation system based on tax credits for the film industry.  How this tax credits for a film industry are different from general business tax cuts is because they are focused on creating the initial infrastructure or economic “eco-system” that causes a significant industry to concentrated in one area.  Creating the basic infrastructure and network of start-up firms concentrated in a particular industry is critical.  It’s how giant industries grow.  It’s the dynamic that created Silicon Valley.  Heck, it’s the dyanamic that created Detroit and Michigan as the center of the auto industry 100 years ago.

We’re backtracking now.  From The Detroit News: http://detnews.com/article/20110511/BIZ/105110359/Michigan’s-film-studios-go-to-fade-out#ixzz1M6IMlJeh

Michigan’s fledgling film studio infrastructure is crumbling as the number of productions declines in the wake of a $25 million limit on state cash incentives for movies, television shows and digital media.

Livonia-based Maxsar Digital Studios, which opened a week before Gov. Rick Snyder announced in mid-February that he wanted to cut and cap the nation’s most generous film and television industry tax incentives, has laid off its 50 employees and idled all productions.

A west Michigan facility known as 10 West Studio has lost two potential film deals, and one of its principal founders has relocated to Los Angeles.

Another studio operated by S3 Entertainment Group in Ferndale was evicted from a Madison Heights location earlier this year for failure to pay rent.

“We don’t have a sufficient industry to support an infrastructure at the $25 million cap,” said Jeff Spilman, founder and managing director of S3 Entertainment Group, referring to Snyder’s plan, which the state Film Office has adopted but the Legislature has yet to approve.

“Everyone who has had the capacity to leave has pretty much left,” Spilman said.

Having government plant the seeds, build the infrastructure, or even fund a young industry is an old and proven tactic for industrial growth.  It worked for railroads, the telegraph, electricity, computers, software, airlines, aircraft, pharmaceuticals, and many others.  Snyder is abandoning what’s proven to work for a magical belief in a genie.

I still expect some gradual improvement in Michigan unemployment, but that’s largely because our good old standby, the auto industry, is recovering and gaining ground.  Unfortunately that leaves Michigan just as dependent on one industry as we were before.

Structural vs. Cyclical Unemployment Revisited: Doing Nothing Is Not a Smart Option

An update on the question of structural vs. cyclical unemployment, this time with respect to policy options for each. For background, see these previous posts:  on how economists define or distinguish between structural and cyclical and a look at the situation in 2011.  Time is short and specialization is efficient, so I’ll quote Mark Thoma on this (and he’ll quote Peter Diamond and Christie Romer):

I wish I’d remembered point three when I wrote recently about the difficulty of separating cyclical and structural unemployment. I was saying, essentially, the same thing that Peter Diamnond says here (via):

Second, for the current moment, the argument about the aggregate demand side is academic, in the negative sense of the word. Current estimates I have seen of how much of the increase in unemployment from a few years ago is “structural,” rather than due to inadequate aggregate demand, still leaves enough need for aggregate demand stimulation that it is clear what direction is needed for further policies.

Third, I am skeptical of the value of attempting to separate cyclical from structural unemployment over a business cycle…. The tighter the labor market and the more valuable the filling of a vacancy, the more a firm is willing to hire a worker who is a less good match, who may need more training…. [A] worker who might be viewed as structurally unemployed, as facing serious mismatch in the current state of the economy, may be readily employable in a tight labor market. The common practice of thinking about the extent of unemployment as a sum of frictional, structural and cyclical parts misses the point…. [D]irect measures of frictional or structural unemployment… dependent on the tightness of the labor market… have limited relevance for the role of demand stimulation policies. The idea that the US economy is not adaptable and capable of dealing with the need for skills and jobs to adapt to each other is peculiar, given the long history of unemployment going up and down. When the labor market is tight and firms have trouble finding workers, they reach out to places they have not looked before and extend training in order to find workers who can fill their needs. Supporting current stimulus policies as very good for the economy is entirely compatible with taking care to avoid future inflation.

Thus, no matter how you slice it or how you define it — and even with a very generous interpretation of the structural estimates — there is still plenty of cyclical unemployment (or, perhaps more precisely, employment that will respond to an increase in demand) to worry about, and plenty for policy to do.

But suppose that, contrary to what the estimates are telling us, there is a large, dominant, structural component. Does that mean we sit on our hands and do nothing? Nope, Christy Romer makes a point I’ve made many times. Even if the problem is structural, there are still things we can do to help:

There’s this debate going on over what the source of the unemployment is: Do we not have enough aggregate demand, or is it structural? What frustrates me is the advocates of the structural theory go from saying it’s hard to turn construction workers into nurses to saying we should do nothing. If you think our problem is structural, there are things we should be doing: money for training, or helping people get out of their mortgages, or massive investment in Detroit. I don’t believe that skills are the problem here, but if that’s your point of view, there’s still a lot we can do. Saying it’s structural is not the same as saying it’s not our problem.

No matter the cause, we’ve dropped the ball on the unemployment problem (and have yet to pick it up). As I said last week, “We have enough money to pay for military action in Libya, but not for job creation?” But Bob Herbert’s last column at the NY Times says it better:

Losing Our Way, by Bob Herbert, Commentary, NY Times: So here we are pouring shiploads of cash into yet another war, this time in Libya, while simultaneously demolishing school budgets, closing libraries, laying off teachers and police officers, and generally letting the bottom fall out of the quality of life here at home.

Welcome to America in the second decade of the 21st century. An army of long-term unemployed workers is spread across the land, the human fallout from the Great Recession and long years of misguided economic policies. Optimism is in short supply. The few jobs now being created too often pay a pittance, not nearly enough to pry open the doors to a middle-class standard of living. …

The U.S. has not just misplaced its priorities. When the most powerful country ever to inhabit the earth finds it so easy to plunge into the horror of warfare but almost impossible to find adequate work for its people or to properly educate its young, it has lost its way entirely. …

Millions and millions of people still unemployed, the prospects of a slow, slow recovery of employment ahead of us (along with the permanent damage that long-term unemployment brings about), and few people in Washington seem to care.

Employment Report – Feb

The February 2011 employment report is in.  I’ll let Calculated Risk summarize, but the bold emphasis is mine:

The BLS reported that payroll employment increased 192,000 in February and that the unemployment rate declined to 8.9%. If we average the last two months together – the 63,000 payroll jobs added in January and the 192,000 payroll jobs in February – there were 127,500 payroll jobs added per month. That is a barely enough to keep up with the growth in the labor force. Private payrolls were a little better at an average of 145,000 per month, as state and local governments continued to lay off workers (something we expect all year).

The decline in the unemployment rate from 9.0% to 8.9% was good news, especially since the participation rate was unchanged at 64.2%. More welcome news included the decreases in the number of long term unemployed, a slight decline in the number of part time workers for economic reasons, and the decline in U-6 to 15.9% – although the levels are still very high….

Overall this was a small step in the right direction, but the overall employment situation remains grim: There are 7.5 million fewer payroll jobs now than before the recession started in 2007 with 13.7 million Americans currently unemployed. Another 8.3 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6 million have been unemployed for six months or more….

Overall this was a small step in the right direction, but the overall employment situation remains grim: There are 7.5 million fewer payroll jobs now than before the recession started in 2007 with 13.7 million Americans currently unemployed. Another 8.3 million are working part time for economic reasons, and about 4 million more workers have left the labor force. Of those unemployed, 6 million have been unemployed for six months or more.

…. Also state and local government cutbacks negatively impacted the employment report – with more to come…

State and local governments reduced employment by 30,000 in February, and several state budgets were in the news, especially the ongoing Wisconsin political battles…
Percent Job Losses During Recessions

The graph shows the job losses from the start of the employment recession, in percentage terms – this time aligned at the start of the recession.

Here are the employment posts yesterday with graphs:
Employment Summary and Part Time Workers, Unemployed over 26 Weeks

Duration of Unemployment, Unemployment by Education, Diffusion Indexes

And some analysis on the participaton rate: Participation Rate Update

Readers might remember what a muddle the January report was (see here, here, and here) due to the conflicting reports of the two primary surveys and the snow which happened in January during the survey period.  If we average January and February together, it appears that the January report was somewhat negatively impacted by the weather.  However, putting the two months together still leaves us with a picture that, yes, is improving. But it is still improving much, much too slowly.  It will still take at least 2-3 years, if not longer at the current pace to get back to full employment.  Deeper inside this month’s report the numbers on private hiring are finally starting to look better (although they’ve done even better in past recessions).  Now we need to worry about the declines in government employment, particularly state and local government.  All those teachers, police officers and fire fighters count as employees too.  And their money and spending is just as critical to the economy as money from private employees.

Obsessing on Deficit When Unemployment Is 9% Is Silly

From Alan Blinder via Brad deLong (bold emphasis mine):

Alan Blinder: The Economic Silly Season Is Upon Us: Debt ceilings’ and ‘job killing’ spending are two dumb ideas. Obsessing on the deficit while unemployment is at 9% is another:

Our country seems mired deeply in the silly season…. The silliness comes in at least four parts. The first is the debate over raising the national debt ceiling…. The increase in the debt each year is simply the difference between total expenditures and total receipts, both of which come from the annual budget. If Congress wants a smaller national debt, it must either spend less or tax more…. [N]either party can just command the national debt to stop growing. Some people see the debt ceiling as a way to force spending cuts that Congress would otherwise refuse to make. Maybe. But it’s a clumsy and risky way that, among other things, could endanger the credit-worthiness of the United States government if our inability to float new debt made it impossible to raise needed cash. And for what purpose? To accomplish something that Congress has the power to do anyway?

The second element of silliness is the belief that the American public stands solidly behind rapid and large budget cuts. Sure, and they also want better weather…. The public wants smaller deficits, lower taxes and less spending in the abstract. But when it comes to specifics, it finds few spending cuts that it likes….

The necessity to choose among various spending cuts and tax increases brings me to the third element of silliness—the one that seems to afflict only Republicans. How many times have you heard Speaker of the House John Boehner (and others) refer to “job-killing government spending”? That phrase has become an official GOP mantra, on a par with “death taxes” and “death panels”—and it’s just about as truthful…. [T]he government should be a smart steward of the public’s money…. [But] when there is so much unused capacity and so many unemployed people hungry for work, “job-killing government spending” is oxymoronic. Virtually any type of spending, public or private, will create jobs.

The final element of silliness is… the popular notion that we need deficit reduction urgently, right now, even though the unemployment rate is still 9%…. The federal budget deficit is on an irresponsibly unsustainable path…. We need to both restrain spending and raise more revenue—and by large amounts. But not right this minute, because doing either would shrink the economy. Despite recent increases, Treasury borrowing rates remain low. There is no evidence that investors are fleeing the dollar. Our economy is still in desperate need of more demand.

Is Our High Unemployment Structural?

So following up on my post on the types of unemployment, when unemployment is high, how do we know if it’s due to structural or cyclical causes?  The answer is important because it tells us what kind of policy actions to take.  Do we need stimulus? (addresses cyclical), or do we need job-retraining, relocation, and education? (targets structural).  There is no clear cut way to tell how much of each type exists.

For example, suppose unemployment is 9%, much as it is today.  Let’s assume that this is a seasonally adjusted number, so we can assume that none of the 9% represents seasonal.  Let’s further assume, just for the sake of arguement, that 5% points of the 9 points represent frictional unemployment.  I should note that this is a somewhat controversial point.  I do not personally think that frictional is in fact that high nor that it we cannot get below that point. Personally I don’t see why frictional should be greater than 2-3%. My views on this are heavily influenced by Bill Mitchell and the MMT people. But since mainstream economics since Milton Friedman has defined it so, let’s accept frictional unemployment as being 5% just for the sake of this argument.  That means there’s another 4% points of the 9 points that must be either structural or cyclical. How can we tell the difference?

There’s no clear-cut way to tell as in doing some direct survey.  Instead we need to look at some indirect indicators.  Two of the more indicators we could look at are: the job seekers  to job openings ratio and unemployment by industry or state.  If our high unemployment is primarily due to structural factors then we should see a low ratio of job seekers to open jobs, and we should see wide differences in unemployment by industry or geography.  If we see low ratio of job seekers to job openings, then that means there are jobs in aggregate but apparently those seekers (unemployed) are unqualified. If we see wide differences in unemployment by industry or geography, it indicates again that jobs exist but they aren’t where the workers are.  On the other hand if the seeker-openings ratio is high, then that means there just aren’t enough jobs period – workers outnumber jobs.  If unemployment is high across all industries and locations, then again there is no unsatisfied sector. There is no structural unemployment.

So with that in  mind, let’s look at the data.  First, via StateofWorkingAmerica.org, we have the job seekers-to-job openings ratio (called the JOLTS data series):

Job Seekers to Job Openings Ratio, US, 2001-2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Yep, it’s pretty high – between five and six workers for every open job.  Next, let’s consider unemployment across industries.  This via Paul Krugman:

here’s the increase in unemployment 2007-2010 by industry of previous employment:

DESCRIPTION

See the structural shift? Neither do I. As others have noted, basically unemployment doubled for every industry, every occupation, every state. Where are the sectors/occupations/regions gaining jobs? Nowhere to be found. There’s nothing structural about it.

But what about geographic mismatch? Let’s go to the state-by-state unemployment numbers from Calculated Risk:

Unemployment Rates by State, Dec 2010

 

 

 

 

 

 

 

 

 

 

 

Still no mismatch. Yes, there are three states under 5% and two more under 6%, but these states are the Dakotas, Nebraska, New Hampshire and Vermont.  Relatively speaking, nobody lives there.

So overall this means it’s not structural unemployment that is keeping unemployment high.  It’s cyclical unemployment.  That means the route to lower unemployment is more stimulus, not austerity. Better yet, a jobs guarantee program could work very effectively.

Types (Causes) of Unemployment

Economists classify unemployment into four types according to what caused the unemployment.  If we assume the goal is “full employment” (never mind how we might define or measure “full” right now – there’s mischief there), then what we’re really saying is that our goal is for the economy to create an appropriate a job for every willing and able worker. Then, if we find that the economy is producing some unemployment, we can and should ask ourselves: why hasn’t the economy produced an appropriate job for each worker?  We then essentially classify the economy’s failure to put every available worker into a job as due to one of four reasons.

  • Seasonal
  • Frictional
  • Cyclical
  • Structural

From a policy standpoint, two are troubling and two aren’t.  The two non-troubling causes or types of unemployment are seasonal and frictional.

Seasonal unemployment means the worker (and his/her skills) is unemployed because it’s the wrong time of year.  A classical example is a downhill ski instructor in July, or part-time holiday sales clerk in February. When time passes, winter for the instructor or November-December for the clerk, they’ll be employed again.  Employment data can be statistically massaged to remove the seasonality and so we typically look at unemployment data that is “seasonally adjusted” and we ignore seasonal unemployment.  Besides what kind of policy could we implement to fix it? Legislate Christmas in July? or pass a low mandating snow?

Frictional unemployment means that actually there is a job for the unemployed worker at the time we measured unemployment, it’s just that the worker and the job haven’t matched together yet.  Frictional represents people looking for jobs that are indeed out there for them.  Again, policy, at least at the macro level is not needed here. These workers will find their finds.  At any point in time in a healthy market economy there will always be some people between jobs.  That’s a good thing since it means people are getting matched to jobs where there’s a better fit. The only ways to drive frictional unemployment to zero is to either have instantaneous job searches or nobody ever moves to a better job.

That leaves cyclical unemployment and structural unemployment.  The difference is important in theory but difficult to identify in practice. Cyclical unemployment is workers who are out-of-jobs because employers cannot sell enough goods.  In other words, the economy is depressed. If it grows faster these people will get hired. Cyclical unemployment can fixed by appropriate macro-level stimulus policies.

Structural unemployment however, while of interest to policy-makers, cannot be fixed as easily by macro-level stimulus policies. Structural unemployment occurs when there is a mismatch at the individual worker-level between the skills, experience, qualifications, and location of the unemployed workers and what’s required for the open job opportunities. Examples of structural unemployment at the national level include:

    • technological obsolescence – we no longer need those skills (or as many with those skills). The classic example is horse livery workers once we switched to automobiles around 1910. A more modern example might include photographers or developers of film (the old silver-halide, analog stuff) after the world has switched to digital photography.
    • location mismatch – the unemployed workers live in one state and the open job opportunities exist somewhere else.
    • educational mismatches – the jobs being created require higher educational degrees or specific trainings, but the unemployed workers don’t have those qualifications.
    • inexperience - the firms hiring all want highly experienced workers or only workers who are currently employed.  The unemployed workers either don’t have experience or don’t have recent/current experience.

Structural unemployment can be reduced through policy actions, but they are different, more micro-level policies.  For example job retraining programs can reduce technological obsolescence. Programs to help people move and relocate will address location mismatch. Educational support and grants will address educational mismatches. Both government direct-hire jobs guarantee programs and employer willingess or incentives to do on-the-job training can address technological, educational, and inexperience issues.