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Our unemployment crisis is not structural

By Michael Konczal

It looks like, from here on out, there's going to be a lot of offhanded references to "structural unemployment," unemployment that demand-centered monetary and fiscal policy can't help. David Brooks is as good of a guide to what very serious people in D.C. are thinking as any, and he is now in the business of randomly referring to unemployment as being "structural." In "Midwest at Dusk," he claims that "[v]oters in [the industrial Midwest] region face structural problems, not cyclical ones."  Where is that coming from?

And here is Allison Schrager, at Free Exchange, writing a survey of the debate:

Fiscal policy: Digging oneself into a hole?: A few weeks ago I heard Robert Solow, Nobel Laureate for his work on economic growth, say fiscal stimulus via government spending was necessary and the most effective tool we currently have to reduce unemployment. Paul Krugman has not been shy about advocating a similar position. At last week's Buttonwood gathering Joe Stiglitz also favoured a Keynesian style push. Chicago’s Ragu Rajan was more sceptical, and thought it would be better to focus on long-term structural problems like a labour force that lacks globally competitive skills and income inequality. The Minneapolis Fed’s Narayana Kocherlakota also doubts how effective stimulus will be when it seems that much of unemployment is structural and not easily remedied by government expansion.

And my new favorite: Kansas City Federal Reserve Bank President Thomas Hoenig makes a #slatepitch here, when he argues that he is worried about unemployment. Why? Because ... wait for it ... "If you try and bring it down too rapidly you are in danger of creating the next problem."

Hoenig is worried that unemployment is going to come down too quickly! (Did he read his job requirements? Maximum employment is on there.)

EPI's Heidi Shierholz crunches the numbers and shows that, on our current trajectory, we are currently 20 years away from 5 percent unemployment. But that might be a little too fast for Hoenig, who is voting against further monetary policy to keep unemployment at a high level to make sure of ... what exactly?

My suspicion is that everyone has their favorite idea about how to fix the country in general, whether it's reforming the tax code, changing how education works, shrinking the financial sector, rebooting homeownership policy, etc. etc., and 10 percent unemployment is just the
excuse to use to do it. Never mind the millions of unemployed, the long-term effects on growth, the idle resources not being put to use -- let's seize the opportunity to finally gang up on those teachers unions and ignore sensible future fiscal and monetary policy!

I've written about how unconvincing structural unemployment is as an explanation for why unemployment is so high right now. To start, right now we have the highest percentage of workers involuntarily working part-time for economic reasons and for "slack work conditions":

Involuntary part-time workers, workers who are working less than 35 hours but want to be working more hours, are up in every sector and in every occupation. These are workers who have some skills at the very least, still enough to work the first hours of their job, and whose
work incentives aren't at a first approximation distorted by unemployment insurance. So even your friends who are lucky enough to have a job are as likely as ever, in the post-Great Depression era, not to be working as much as they want to. The same can be shown for unemployment itself, which is proportionately higher in every sector.  But it might be easier to show this argument in practice with a case study.

Children: Teach them well and let them lead the way. Or not.

According to the CPS, college-educated 20- to 24-year-olds had an unemployment rate of 9.6 percent in September 2010, virtually identical to the national average. It's been high across the entire year. In December of 2007, when the Great Recession started, the rate was 3.4 percent.  It's the largest ratio increase among education and age groups during the recession during that time period (2.82).  It is extra worrisome because people who graduate into a recession, through the workings of hysteresis, show career scarring decades down the road.

How could structural unemployment explain this massive increase in unemployment for college-educated 20- to 24-year-olds? Here are the normal things people bring up in structural unemployment arguments:

Education: It's hard to argue that, in aggregate, young people with college degrees are woefully unprepared for the jobs of the 21st-century economy. Certainly the college experience hasn't collapsed in the past three years to the point where suddenly American colleges, usually considered the best in the world, are no longer cutting it. Usually the education angle is pushed at those with only a high school degree (current unemployment rate for 20- to 24-year-olds, 17.9 percent) and the general recent downward trend in employment ratios. But this shock is far beyond that, and hitting people it normally doesn't hit. Even fresh out of college, there's just not enough demand for labor.

Housing bust, mobility: The IMF has found that a large amount of "structural unemployment" is correlated with foreclosures. It is also correlated with percent of mortgages that are underwater (which is correlated with foreclosures), as well as budget shortfalls in states. The only one of these that is technically structural is the mobility issue of being underwater, where people can't sell their homes to go off and pursue new job opportunities. The others are related to a debt overhang, spillovers from deficient negotiation infrastructure for mortgage debt or a demand retrenchment story.

There are a lot of places in the United States you'd like to leave, but not a lot you'd like to move to. As such, I think the mobility thing is overhyped (people, after all, can strategically default on their old house to get a new job, even though banks might not foreclose on them), and this is really capturing demand and debt overhang dynamics. But either way, 20- to 24-year-olds with college degrees are not sitting idle because they bought a mortgage that is suddenly 50 percent underwater.

Supply side: Just this morning the Wall Street Journal ran an
editorial by David Warsh
arguing that supply side concerns needs to be watched.

In general, we have price signals to give us a clue if this is a problem. And as Brad Delong notes, "If unemployment were structural, and not easily remedied by government expansion, inflation right now would be stable or rising. It is not." We see high unemployment and deflationary signals, the sign that we are in a demand problem, not a sign we are in a supply problem.

The normal labor interventions the Casey Mulligan types would flag as causing higher unemployment right now are an increase in the minimum wage and expanding unemployment insurance, neither of which is particularly relevant for our 20- to 24-year-old college degree earners. Those 20- to 24-year-olds are now covered by their parent's insurance, and in general it is really cheap to provide them with health insurance. Whatever the implications of health care on relative competitiveness in employment, it's not an issue here.

Europeanization: But meanwhile the generation of Americans who are supposed to start building their careers, innovating and creating the future of the economy are sitting idle. It's funny, everyone on the right is always screaming about the Europeanization of the U.S. economy. Ironically, they have been screaming about the part where we could get decent universal coverage and some trains, and not the part where the GOP is going to sit over in the next two years, the part where a generation becomes permanently detached from the formal labor markets.

Mike Konczal is a fellow at the Roosevelt Institute. He blogs about finance, economics and other topics at Rortybomb and New Deal 2.0, and you can follow him on Twitter.

By Michael Konczal  | November 8, 2010; 1:00 PM ET
 
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Comments

"Those 20- to 24-year-olds are now covered by their parent's insurance, and in general it is really cheap to provide them with health insurance. Whatever the implications of health care on relative competitiveness in employment, it's not an issue here."

Actually, that's not at all correct! It is COMPARATIVELY cheap to cover those in that age group. However in absolute dollars, which is what will have to be paid out, there will be a large increase.

Remember virtually none of these individuals were previously covered, and SUPPOSEDLY according to this and many other columns health insurance premiums AREN'T increasing to cover these individuals.

Therefore there HAS to be an icrease in absolute terms. You can't have it both ways.

Posted by: 54465446 | November 8, 2010 2:38 PM | Report abuse

Another lib writer that has absolutely no idea what he is talking about. Just Look at the mess your strategies have produced. Are you blind? Government IS THE PROBLEM and always will be. Get a job.

Posted by: vintax1 | November 8, 2010 7:58 PM | Report abuse

Don't blame the GOP. And the unemployment rate most certainly is structural, with jobs going to the cheapest labor markets facilitated by a DEMOCRAT run Congress who also gave us Mortgage Gate. Go tweet something to your liberal think tank buddies. There's a positive feedback loop for you.

Posted by: InformedConsent | November 9, 2010 7:26 AM | Report abuse

considering the reactionary responses, i believe all is lost

as no has a solution that fits the problem. They just slap a

label on the problem and then ignore it as a given.

Posted by: kennytal | November 9, 2010 10:09 AM | Report abuse

Wrong. It's structural because despite the macro arguments made here, Ezra can't point to one specific services industry that will experience verifiable net jobs growth over the next five years. We could absolutely pump prime manufacturing and become "fully employed" but what Ezra and the left don't want to talk about is the fact that services have been the main driver of wealth creation for the middle class. So, fine, let's build a gazillion green manufacturing facilities but at half the average wage of recent service industry jobs. Oh, wait, the left would actually pay blue collar workers the same as accountants, doctors and bankers, so maybe I need to rethink this.....

Posted by: siemprefue | November 9, 2010 12:27 PM | Report abuse

Sorry, I think Ezra is wrong and the commenters are wrong as well. The unemployment crisis is not cyclic, because it's not going to cycle. We are just going to see continued decreases in employment and wealth. Until the political system is responsive to the middle class, and not to the very wealthy, until the economy is not fixed to favor the financial industry, and until Americans decide to think before they speak, and think before they vote, we will continue to see economic decline.

The Republicans will increase the deficit by cutting taxes and raising the defence budget. There is no hope for us.

Posted by: billwhite1 | November 9, 2010 2:34 PM | Report abuse

The Republican party and its bosses on Wall Street and at the US Chamber of Commerce have committed this nation to outsourcing with the help of third way Democrats who are captive to the same ownership pool as the mouthbreathing republicants.
We are doomed to having the same wage structure as every other third world colony and communist sweatshop backwater because the oligarchs want it that way and are willing to pay Fox News and all the other right wing propaganda outfits (face it, all the media out there is pretty much corporate hackery) to convince people it is their own fault that they haven't had a real income increase since 1973 and further that it is their own fault.

Posted by: sparkplug1 | November 9, 2010 6:20 PM | Report abuse

This is a shocker.

Standard template for progressive response to calls for fiscal restraint:

[Conservative economic critique] cannot be true because if [conservative economic critique] were true, then [aggregate economic measurement that is literally the product of innumerable factors] would not be what it is.

Posted by: BradPotts | November 10, 2010 2:51 PM | Report abuse

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