Is Today's Unemp Structural? by Brad de Long
Source M. Raghu
Date 10/10/26/14:43
Is Today’s Unemployment Structural?

We hear from surprisingly many quarters these days that governments in
Europe and North America, and their central banks, should give up on
the expansionary policies they have pursued to try to create jobs.
Critics of government stimulus maintain that the high unemployment
currently afflicting the North Atlantic is not cyclical but
“structural,” and thus cannot be alleviated by policies that boost
aggregate demand. Let me be the first to say that structural
unemployment is a true and severe danger.

When people who in other circumstances could be happy, healthy, and
productive members of the workforce but lack the skills, confidence,
social networks, and experience needed to find work worth paying for,
we obviously have a problem. And if unemployment in Europe and North
America stays elevated for two or three more years, it is highly
likely that we will have to face it. For nothing converts cyclical
unemployment into structural unemployment more certainly than
prolonged unemployment.

But is that true today? Does it look right now as if the biggest
problem facing the economies of Europe and North America is structural
unemployment? It does not.

Let us remember what structural unemployment looks like. The economy
is depressed and unemployment is high not because of slack aggregate
demand generated by a collapse in spending, but instead because
“structural” factors have produced a mismatch between the skills of
the labor force and the distribution of demand. The structure of
demand by consumers is different from the jobs that workers are
capable of filling. For example, suppose that you have many workers
qualified and skilled to work in construction, but households have
decided that their houses are more than large enough, and
wish to fill them with manufactured goods. This would produce
structural unemployment to the extent that the ex-construction workers
could not do things in manufacturing that would make it worthwhile for
manufacturing firms to hire them.

In that case, we would expect to see construction depressed: firms
closed, capital goods idle, and workers unemployed. But we would also
expect to see manufacturing plants running at double shifts—the money
not spent on construction has to go somewhere, and, remember, the
problem is not a lack of aggregate demand. We would expect to see
manufacturers holding job fairs, and when not enough workers showed
up, we would expect to see manufacturers offering higher wages to
attract workers into their plants, and then raising prices to cover
their higher costs.

The size and duration of the excess unemployment of ex-construction
workers might be substantial and long lasting. It might require
significant time to retrain construction workers and plug them into
social networks in which they become good manufacturing workers. We
might see prolonged and high unemployment in the construction sector,
and in regions that had seen the biggest previous construction booms.

But depression in the construction sector and unemployment among its
ex-workers would be balanced by exuberance in the manufacturing
sector, rising prices for manufactured goods, and long hours and high
wages for manufacturing workers.
That is what “mismatch” structural unemployment looks like—and it is
not what we have today, at least not in Europe and North America. In
the past three years, employment in construction has shrunk, but so
has employment in manufacturing, wholesale trade, retail trade,
transportation and warehousing, information distribution and
communications, professional and business services, educational
services, leisure and hospitality, and in the public sector.
Employment is up in health care, Internet-related businesses, and
perhaps in logging and mining.

In the United States, the past three years have seen employment fall
from 137.8 million people in July 2007 to slightly less than 130
million in July 2010—a decline of 7.9 million during a period in which
the adult population grew by six million. What we have witnessed is
not a shift in demand into sectors lacking an adequate number of
qualified and productive workers, but rather a collapse in the level
of aggregate demand.

This may well look like structural unemployment in three years. In
three years, we may well see labor shortages, rising wages, and
increasing prices in expanding sectors, accompanied by high
unemployment elsewhere in the economy. But that is not our problem
now. Sufficient unto the day is the evil thereof.

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