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We have unemployment, not structural unemployment

The term "structural unemployment" gets bandied about a lot, but it isn't explained very clearly or very often. In a nice column for Project Syndicate, Brad DeLong explains what structural unemployment is, and how we know we're not facing it:

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.[...]

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.

By Ezra Klein  |  August 31, 2010; 1:30 PM ET
 
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Comments

I believe a lot of the jobs created after the tech bubble burst were either directly or indirectly related to the real estate bubble - jobs in finance, Wall Street, construction, mortgage processing, real estate agents, etc. When that sector recovers, it will not be able to accommodate the number of workers it did before - some of those folks will have to change careers and find employment in other sectors of the economy.

Just because there aren't other sectors in the economy starving for workers doesn't necessarily mean we don't have a structural unemployment issue.

Posted by: sold2u | August 31, 2010 1:46 PM | Report abuse

The problem is that very serious people believe there is structural unemployment, or simply neglect to look into data before speaking about it:

"Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today’s unemployment problem is caused by issues the Fed can’t solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted."

Also, too many people in positions of power and influence believe this is a supply side problem despite all evidence pointing to the contrary!

We're going to be hurting for a long, long time because serious people are indifferent to the suffering of us lowly middle class Americans.

Posted by: will12 | August 31, 2010 2:15 PM | Report abuse

This analysis completely ignores globalization and changes in technology. US has been loosing jobs in areas like manufacturing for a long time and replacing them with in part jobs related to the housing/financial bubble. Many of the bubble jobs went away, perhaps permanently, but we're not really growing in fields that can easily be done elsewhere. There is plenty of world-wide demand, look at Germany's and China's manufacturing growth. It's just we can't compete there, a very structural problem.

Posted by: arthur11 | August 31, 2010 2:16 PM | Report abuse

"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."

The housing bubble drove demand in many other industries. New housing developments mean more furniture, consumer electronics, paint, real estate agents, loan officers, Pizza Huts, Macy's, McDonalds, Wal-Marts, schools, etc.

All of this activity then has secondary effects on other products, as these people buy cars, manufactured goods, go to the spa, go on vacations, etc.

By 2005, we were building way too many homes and consumers were up to their eyeballs in debt.

So now housing is dead in the water, and consumers are deleveraging. This is a multi-year (perhaps decade long) process. Construction workers cannot go back to their job as home builders, and thus we will not need as many real estate agents or loan officers. Construction workers are also not needed as much in commercial real estate, given that little residential real estate activity is going on. With few new homes, there is less need to purchase new furniture and expensive consumer electronics, and so less employment in retail and manufacturing. These unemployed workers will not be going on vacation, or to the spa, or buying new cars.

What are the new sectors? Probably export industries and healthcare, although I could be wrong (particularly on that first one). But I definitely hear about things like doctor and nursing shortages all the time, and with Obamacare and the baby boomer retirement that looks like the primary growth sector. It's pretty hard for a construction worker or factory worker to become a doctor or nurse, and particularly so if the ones that are able to transition to another sector are being paid to repave perfectly good roads by stimulus or are collecting unemployment.

As more and more people enter into the growth sector(s), it will pull up demand in other sectors as they buy cars, homes, go to the mall, take vacations, etc.

We could have tried to keep the party going by continuing to inflate the debt bubble (and we did try to some extent), but at some point something will have to give and we'll be stuck with an even bigger crash.

Posted by: justin84 | August 31, 2010 2:18 PM | Report abuse

Structural unemployment is hypothetically possible. Right here and right now "structural unemployment " is just an excuse for not doing, and not caring, anything about unemployment.

Posted by: gVOR08 | August 31, 2010 3:21 PM | Report abuse

Not to be too simplistic about the situation, but isn't it possible that there's a combination of structural and cyclical unemployment? I'll leave it to the analysts to figure out the contribution of each.

Posted by: dasimon | August 31, 2010 4:40 PM | Report abuse

"Not to be too simplistic about the situation, but isn't it possible that there's a combination of structural and cyclical unemployment? I'll leave it to the analysts to figure out the contribution of each."

In all likelihood, yes, there is some of each. Cyclical may even be the dominant factor. As time goes on, I'd expect structural unemployment to become more and more dominant.

In addition for the need to switch out of shrinking industries with little prospect to return to the pre-bubble highs in the near term, there is also other drivers of structural unemployment:

- Skills & attractiveness to employers each deteriorate as the time out of work increases, and many people have been unemployed for more than a year.
- Millions of Americans are upside down on their mortgages and so labor force mobility is reduced
- Its controversial to say here, but most economists consider unemployment insurance to add several tenths of a percentage point to unemployment (not that helping those down and out on their luck is a bad thing - merely an observation)

Posted by: justin84 | August 31, 2010 7:11 PM | Report abuse

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