Unemployment – The Current Debate
For those of you sick and tired of the banking system and all the fuss being made about its reform, here’s an interesting diversion: how much of our unemployment problem is cyclical? and how much is structural?
This is a vital question.
Cyclical unemployment is that part that is cause specifically by the recession. The jobs lost due to plant closings or efforts by businesses to protect profits during the recession are usually quickly replaced once the economy gets going again. Don’t forget that a recession is the result of a sudden drop in what we call ‘aggregate demand’ – the sum of all the stuff consumers, businesses, and governments inside the economy buy each year. When demand drops businesses are forced to adjust and so they fire workers. Once demand recovers those workers are usually re-hired and the damage done by the recession is quickly overcome.
Structural unemployment si totally different. It is the result of lay-offs by businesses that never get well again and so do not re-hire. This kind of job elimination usually stems from technology changes and similar permanent shifts in the skills required to be an effective employee. The jobs lost in older manufacturing plants are good example – cars still get produced, but we require fewer car workers, and those out of a job in the auto industry find that their skill set is no longer useful anywhere in the economy.
The problem with structural unemployment is that it takes much longer for a worker who needs to learn a new skill, or whose current skill is out of date, to find a new job.
Structural unemployment can also stem not from the worker’s skill set, but from other circumstances that prevent a worker from applying for new work. The current recession is a good example of this latter problem. There are many unemployed people who cannot move from their current location to areas where there are jobs because they cannot sell their current home – this is especially the case for the one-in-four households where there is negative equity in the home. In such a situation remaining unemployed is less financially crippling in the medium term than trying to repay a mortgage in excess of the homes value. Workers in this situation are obviously loathe to bankrupt themselves, and yet face long term unemployment as a side effect of the drop in their home’s value.
The kind of unemployment you think is contributing to the current jobless rate of 9.0%+, helps determine the policies you put in place to deal with it.
The stimulus last year was aimed not at unemployment, but at aggregate demand. Then idea being to restore the economy to a growth path as quickly as possible. It was a side benefit of this approach that jobs would be created. This line of reasoning is why policies aimed at bulking up demand presume that unemployment is cyclical. The notion is that once demand is restored, jobs will automatically reappear.
Given the prolonged and stubborn nature of the unemployment rate during this recession, some analysts have begun to wonder out loud as to wether the US economy faces a major structural problem – our workers are ill suited for the kind of work that are abundant toady.
To an extent I agree with this argument.
Clearly we are facing a very serious long term unemployment problem. We have never had such a high proportion of people unable to get jobs for such long periods. But underneath the headline numbers there are some disturbing trends: many of the people being fired find work quickly – just as in past recessions. What is different this time is that the economy collapsed so hard so fast that the cyclical component of unemployment has ‘leaked over’ into a structural problem. Workers who are out of the workforce for extended periods find it ever harder to re-enter. Their skills erode, and they become progressively less attractive as employees. Given the enormous flood of lost jobs early in this recession there are now a very large number of workers who fall into this category.
We also seem to have a major gap between the jobs the economy can create and the skill set of our workers. In the vernacular, we have far too many factory and construction workers, and far too few service sector and technology workers.
If we believe structural unemployment is the root of our high jobless rate, then attacking it with the kind of stimulus designed to fix the shortfall in demand won’t have much impact. This is because even if demand picks up, businesses don’t want to hire and/or train workers whose skills are inappropriate. The odd outcome of this could be high unemployment and yet a shortage of workers in some industries.
A better set of policies would be a stimulus aimed directly at skill levels, re-training, and even re-location.
One of my frustrations with the stimulus plan of last year was that it was too laden with tax cuts that are well known to be ineffective as a demand stimulus, and yet very light on training and direct employment efforts. It assumed unemployment was more cyclical than structural.
Our jobs problem is clearly both. So our policies need to attack both.
As of now we have been ineffective in our attack on the structural problems within the economy. More to the point: the political will doesn’t seem to be there to make such an attack.
Which is why we need to surface the debate about the true sources of unemployment.
One thing we do know: it isn’t laziness the way the GOP tarnish it as being. It would be helpful if someone on the right could contribute something sensible, rather than resort to Victorian era bromides about lazy workers living of unemployment checks.
But that may be too much to ask.
