Day: August 17, 2010

Frictional, Structural, Cyclical Unemployment Defined

/ Jim Luke / 12 Comments

Mark Thoma explains the difference between cyclical, structural, and frictional unemployment:

As I noted in a previous post, economists define three types of unemployment: frictional, structural, and cyclical:

Frictional unemployment is defined as the unemployment that occurs because of people moving or changing occupations. Demographic change can also play a role in this type of unemployment since young or first-time workers tend to have higher-than-normal turnover rates as they settle into a long-term occupation. An important distinguishing feature of this type of unemployment, unlike the two that follow it, is that it is voluntary on the part of the worker.

Structural unemployment is defined as unemployment arising from technical change such as automation, or from changes in the composition of output due to variations in the types of products people demand. For example, a decline in the demand for typewriters would lead to structurally unemployed workers in the typewriter industry.

Cyclical unemployment is defined as workers losing their jobs due to business cycle fluctuations in output, i.e. the normal up and down movements in the economy as it cycles through booms and recessions over time.

In a recession, frictional unemployment tends to drop since people become afraid of quitting the job they have due to the poor chances of finding another one. People that already have another job lined up will still be willing to change jobs, though there will be fewer of them since new jobs are harder to find. However, they aren’t counted as part of the unemployed. Thus, the fall in frictional unemployment is mainly due to a fall in people quitting voluntarily before they have another job lined up.

But the drop in frictional unemployment is relatively small and more than offset by increases in cyclical and structural unemployment.

News Flash: US Not Dependent on China

/ Jim Luke

Facts are stubborn things.  For the crowd that believes government borrowing drives up interest rates and “crowds out” private investment, facts and reality are also very inconvenient.  Marshall Auerbach, guest blogging for Yves Smith at Naked Capitalism reports the latest facts:

In a post titled “China Cuts US Treasury Holdings By Record Amount,” Mike Norman makes the excellent observation that while China is moving its money out of Treasuries, interest rates are hitting record lows. In other words, the sky still isn’t falling. So, Mike wonders, “Where is the Debt/Doomsday crowd?” He rightly concludes: “They’re nowhere to be found because they can’t explain this. This is a ‘gut punch’ to them. Their whole theory is out the window. They just don’t understand or don’t want to understand, that interest rates are set by the Fed…PERIOD!!!”

Mike is right, but that won’t stop the doomsayers. They will tell us that we should thank our lucky stars that another source of demand came in to replace China. Even when confronted with facts, the “China will sell off all their treasury holdings and destroy the US economy” brigade is not dissuaded.

As my friend, Warren Mosler, has noted many times, “It’s just a reserve drain, get over it!
And if you don’t understand that, try educating yourself before you sound off.”

Also of note today: Tokyo’s Nikkei QUICK News reports that the #309 10-year Japanese benchmark government bond, the current benchmark, traded to a yield of 0.920% Tuesday morning, down 2.5 basis points from yesterday’s close. This is the lowest yield since August 13, 2003. This, from a country with a public debt-to-GDP ratio of 210%!

The idea of shorting JGBs on the grounds of Japan’s imminent national insolvency has been one of the most “obvious” trades for years, but it’s never worked. And it won’t work because the Bank of Japan, like the Federal Reserve sets rates, not “the markets”. The “national insolvency” brigade doesn’t understand basic public reserve accounting. Plot the rise of Japanese public debt against the fall in Japanese bond yields (the latter which can be seen here since 1985 – http://www.boj.or.jp/en/type/stat/dlong/fin_stat/rate/hbmsm.csv). Where’s the causality?

The problem, as Bill Mitchell has repeatedly noted, is that the credit binge that preceded this crisis has left a lot of private consumers and investors in diabolical straits with too much nominal debt and declining values of the assets the debt backed. The need to remedy this problem led to a widespread withdrawal of private spending as the pessimism of future growth spread and the expenditure multipliers reverberated this pessimism across the world economies. The offset to that has been a rise in public sector debt to facilitate this ex ante desire to save on the part of the private sector. Absent that, you get Fisher style debt deflation dynamics a la the 1930s.

These are facts. Inconvenient for those who like to perpetuate the lie that the US or Japan faces imminent national insolvency as a means of justifying their almost daily attacks on proactive fiscal policy.

Mothers, Children and GDP

/ Jim Luke

One of the points I attempt to make in macro class is how GDP, Gross Domestic Product, is neither a precise way to measure health of the economy, nor is a very good measure of overall economic well-being.  In other words, just because GDP goes up doesn’t mean we’re necessarily better off.  Usually one is safe in concluding that when GDP goes down that things have  gotten worse, but rising GDP is not necessarily a sign of progress.

In addition, GDP and the way it is measured is highly biased.  It values anything done for sale or anything purchased.  But work that is done without a sale, such as altruistic work and favors done for another, or work that is done for oneself does not count at all.  Given our Western culture, this produces a distinct bias.  Much women’s work, particularly the work of mothers, is not valued at all.  This is not good.  Maxine Udall explains many of the consequences for women of how we measure GDP in her post  Protecting Our Grandchildren: The High Price of Motherhood.

Inflation or Deflation? Look at Data

/ Jim Luke

For nearly two years now the neoclassical, quantity-of-money-theory inspired folks have been fearing inflation.  Inflation, it has been said, was the necessary end result of the government deficits and central bank bailout efforts that helped keep the Great Recession from turning into Great Depression 2.0.  Let’s look at the data:

Inflation Measures Click on graph for larger image in new window.

This graph shows three measure of inflation, Core CPI, Median CPI (from the Cleveland Fed), and 16% trimmed CPI (also from Cleveland Fed).

They all show that inflation has been falling, and that measured inflation is up less than 1% year-over-year.

All this while the Central Bank (The Fed) claims it’s inflation target is 2-3%.  Sorry folks, the “inflation is coming, inflation is coming” chicken littles lose this one.  That graph is definitely going downward.  What we have to fear is deflation, not inflation.

Why Long-Term High Unemployment Is Bad. Very Bad.

/ Jim Luke

First, let’s review what’s happened with unemployment in the U.S. during this depression Great Recession.  It’s the red line that is most disturbing – the % of labor force that is still looking for work after being unemployed for over 6 months. As the graph shows, this is new stuff.  Well actually it has happened before – in the Great Depression of the 1930’s.

An update by request …

Unemployment Duration Click on graph for larger image.

This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more.

Note: The BLS reports 15+ weeks, so the 15 to 26 weeks number was calculated.

In July 2010, the number of unemployed for 27 weeks or more declined slightly to 6.572 million (seasonally adjusted) from 6.751 million in June. It is possible that the number of long term unemployed has peaked, but it is still very difficult for these people to find a job – and this is a very serious employment issue.

The less than 5 weeks category increased in July and is now at the highest level since January – and that is concerning.

Now let’s consider the consequences if this continues, as looks likely, for another 5-10 years or even longer. Let’s consider Japan which has already experienced what is nearing two “lost decades”. In particular the new job opportunities have been missing for young entry workers.  It’s not pretty.  An increasingly two-class society.  Large numbers of young (in their 20’s and 30’s) people who never leave home.  Increased crime and social tensions:

What happens to a generation of young people when:

  • They are told to work hard and go to college, yet after graduating they find few permanent job opportunities?
  • Many of the jobs that are available are part-time, temporary or contract labor?
  • These insecure jobs pay one-third of what their fathers earned?
  • The low pay makes living at home the only viable option?
  • Poor economic conditions persist for 10, 15 and 20 years in a row?

For an answer, turn to Japan. The world’s second-largest economy has stagnated in just this fashion for almost 20 years, and the consequences for the “lost generations” that have come of age in the “lost decades” have been dire. In many ways, Japan’s social conventions are fraying under the relentless pressure of an economy in
seemingly permanent decline.

Stacking the Deck Against Workers and Seniors

/ Jim Luke

Marshall Auerbach at New Deal 2.0 lays out the poorly-reported situation on President Obama’s Commission on Fiscal Responsibility.  The deck is stacked against Social Security. Several of the commission members have clear conflicts of interest and would personally benefit from privatization of SS or at least reduction of future SS benefits.  Yet there are no real representatives of today’s workers or seniors.

Now that the President has opened this Pandora’s Box, it is hard for him credibly to make the case, as he attempted to do in last Saturday’s weekly radio address, that “some Republican leaders in Congress want to privatize Social Security.” In fact, it is an idea enthusiastically embraced by a number of Wall Street Democrats who are funded with huge campaign contributions from Wall Street itself. (Candidate Obama received more money from Wall Street in 2008 than Hillary Clinton.) These contributors would be the Rubinites who for decades have played a huge role in allowing for greater financial leverage ratios, riskier banking practices, greater opacity, less oversight and regulation, consolidation of power in ‘too big to fail’ financial institutions that operated across the financial services spectrum (combining commercial banking, investment banking and insurance) and greater risk. Privatization of Social Security represents the last of the low hanging fruits for Wall Street. Who better to provide this to our captains of the financial services industry than their major political benefactors in the Democratic Party?

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The issue of privatization is germane when one considers the members of the Commission approved by the President. There are questions of possible conflicts of interest. As James Galbraith has noted, the Commission has accepted support from Peter G. Peterson, a man who has been one of the leading campaigners to cut Social Security and Medicare. It is co-chaired by Erskine Bowles, a current Director at North Carolina Life Insurance Co (annuity products are a competitor to Social Security and would almost certainly be beneficiaries of the partial privatization). Mr. Bowles’ wife, Crandall Close Bowles, is on the Board of JP Morgan, and she is also on the “Business Council,” a 27 member group whose members include Dick Fuld, Jeff Immelt, Jamie Dimon and a plethora of other Wall Streeters.

At the very least, these kinds of ties raise questions in regard to proposals for dealing with Social Security. Many members of the Commission stand to become clear direct and indirect beneficiaries of the privatization that the President is now warning against. It’s disappointing that these ties have not been fully explored by the press, and it is extraordinary that the President would exhibit such political tone deafness in making these kinds of appointments. It tends to undercut the message of his last radio address.