Unemployment: Strucs vs Cycs

By Felix Salmon
August 25, 2010
Brad DeLong places himself squarely in the camp of the Cycs rather than the Strucs when it comes to Jim Ledbetter's distinction between economic unemployment theorists. The Cycs think that unemployment is cyclical and will fall as demand grows; the Strucs think it's structural, and the result of a mismatch between the jobs available and the unemployed workers looking for employment.

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Brad DeLong places himself squarely in the camp of the Cycs rather than the Strucs when it comes to Jim Ledbetter’s distinction between economic unemployment theorists. The Cycs think that unemployment is cyclical and will fall as demand grows; the Strucs think it’s structural, and the result of a mismatch between the jobs available and the unemployed workers looking for employment.

DeLong reckons that there can’t be much of a mismatch, because there’s precious little evidence of excess demand for labor in any industry. But this ignores, I think, globalization: companies which can’t fill jobs domestically simply outsource them, or set up shop abroad. Rather than looking just at U.S. employment figures, it would be helpful to look also at the total number of people employed by U.S. companies, and see whether that’s showing a different trend.

I also think it makes sense to break the Struc argument down into its component parts: the inability of the unemployed to find work, on the one hand, and the inability of employers to find good employees, on the other. The first part seems to be undeniable, and it’s surely getting worse as the length of time that people have been looking for work rises inexorably. The longer you’ve been without a job, the harder it becomes to get one, until you become unemployable.

Meanwhile, just because it’s hard to find good employees doesn’t mean that your business is booming and that there are lots of incentives for the unemployed to join your industry. The Cycs could well have a point here — if we get an uptick in total demand, then that might help increase employment in the parts of the economy with tight labor markets. But for the time being, employers who can’t find the employees they want seem to be resigned to simply keeping on going with the employees they’ve got: dreams of expansion have given way to grim survival and a refusal to take on extra debt or risk. And they certainly don’t want to risk raising their prices in this economy, even if they suspect they could get away with doing so.

And then there are all the stickinesses in the labor market: people like to stay where they are, rather than moving to where the jobs are. (This fact is only exacerbated by high homeownership rates.) They tend, certainly in the first instance, not to even look for jobs which pay much less than they were last earning: if you used to be a high-producing subprime mortgage originator, it’ll take a while before you consider training to be a yoga instructor. And then, by the time that you capitulate to the new economic reality, you’ve been unemployed for so long that your chances of getting any job at all have dissipated significantly.

Empirically, there’s no doubt that the Cycs have been proved wrong in their forecasts: unemployment now is significantly worse than the Obama administration forecast even without the benefit of the stimulus package.

Yes, at the margin, government stimulus can create jobs. Especially if its carefully targeted towards things like small-business lending and arts subsidies. But job creation is more of an art than a science, and there’s always a chance it’ll fail. Especially if you attempt it in the face of full-bore Republican obstructionism in Congress. So the political reality is that high unemployment is going to be with us for the foreseeable future. Which is something that I’d guess both the Cycs and the Strucs would agree with.

(Via, and for, Heidi)

12 comments

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I think the real role that confidence (lack of) plays in our tepid recovery is a lack of confidence in the USA as a good place to hire, to invest in employees. We are on a dedicated spree of job loss to low wage, low regulation locales, and have been for decades. The momentum is behind going offshore.

America has become stigmatized as a locale for investment in job creating industry.

It simply makes more sense for companies to invest elsewhere.

This won’t change until Congress wakes up and smells the protectionist coffee. I think they don’t have the kahunas for the moment – and foreseeable future. That means our unemployment will have to get dreadful, considerably worse, before the inevitable happens.

Buckle up for a rocky ride.

Posted by nyet | Report as abusive

Arts subsidies? Okay, I’ll bite – why? It doesn’t seem like the type of business activity that would have a significant impact on job creation.

Posted by Curmudgeon | Report as abusive

Maybe we could stop saying “unemployment” and start saying DISemployment?

The 10% nominal (20% real) numbers are the result of choices by our policy elite, and not accidents.

Posted by lambertstrether | Report as abusive

In a hypothetical laissez-faire free market where employers are free to pay as little as they want and without a generous safety net (which we arguably have), I am certain that unemployment would be extremely low.

This is simple economics. The price of labor would move to a market clearing level.

Our Federal minimum wage has risen to $7.25 per hour and with taxes and benefits, is at around $10 per hour. This comes to around $1600 per month at minimum. In thriving cities, this minimum wage isn’t that much of a problem but in poor and rural areas, it completely ruins the functioning of the market. Felix, your playground is Manhattan. Out in Michigan or Arizona, if a teenager could make $5 an hour all summer long, it would provide a boost to his family’s finances and the local economy. He won’t starve and he’ll probably learn a lot and make more next year. Instead, the bottom rungs of the ladder don’t exist.

In China the average wage is somewhere around $200 per month. As long as companies have a fiduciary duty to their shareholders, high unemployment will be with us.

Deflation is very bad for employment at the lower levels in the face of high minimum costs. Inflation would reduce the impact of these high minimums, but we don’t have inflation presently.

The Strucs have it, IMO.

Posted by DanHess | Report as abusive

I partly agree with DanHess in that the minimum wage has risen too quickly for business to adjust. $7.25/hr is a pittance, but with full-time hours it gets one out of poverty. I don’t have the numbers in front of me, but wasn’t the minimum wage in America something like $4/hr only 5 years ago? That nearly 100% wage hike in such a short period is an enormous burden… the price is right, but the adjustment period should have been longer or some type of hiring credit available to help with the new cost of labour.
I also agree that some kind of apprenticeship or co-operative work experience mechanism should be in place, whereby kids/young adults can get experience in their field but perhaps work at a reduced rate for the chance. This really does benefit everyone – even though it opens up the opportunity for abuse.

Posted by CDN_finance | Report as abusive

Enterprises with

Posted by peat | Report as abusive

@peat, it is econ 101, which maybe you did not study in school. If the price is completely free to move, the market will clear. I am not discussing whether it is socially desirable to let the market-clearing price be so low. But we shouldn’t fix prices and then act surprised when the market doesn’t clear. It is precisely at the low levels near minimum wage where unemployment is through the roof, at depression-levels.

http://www.dol.gov/compliance/guide/minw age.htm
“Employees of firms that do not meet the $500,000 annual dollar volume test may be covered in any workweek when they are individually engaged in interstate commerce, the production of goods for interstate commerce, or an activity that is closely related and directly essential to the production of such goods.”

Minimum wage therefore covers just about every business.

On another note, the shift in young people away from the skilled trades is a big source of the unemployment problem, according to Manpower.
http://finance.yahoo.com/news/Lack-of-sk illed-workers-rb-1457929627.html?x=0&sec =topStories&pos=7&asset=&ccode=

Posted by DanHess | Report as abusive

@DanHess, come now, this is week 1 of econ101 stuff that you’re misapplying. You’ve learned in your econ101 about the assumptions behind the model of perfect competition[1], haven’t you?

Intra-township lawn care is not interstate commerce.

[1] http://en.wikipedia.org/wiki/Perfect_Com petition#Necessary_assumptions

Posted by peat | Report as abusive

CDN_finance: the minimum wage 5 years ago was $5.15, which adjusted for inflation, was the lowest it has ever been since the 1940s.

Posted by Jules717 | Report as abusive

Dan Hess, youth under 20 can be paid $4.25 for their first 90 consecutive days with an employer.

Posted by Jules717 | Report as abusive

Housing prices are not the only impediment to moving. I am a lawyer/CPA who has been out of work for 11 months, since mass layoffs hit for those who weren’t bringing in enough revenues. I am a technician, and planner, not a country-club member who drums up business by establishing buddies from whom I can call up for business.

Being only licensed in MD, it would be a huge difficulty getting licensed in a new state without a job in hand. Why should I spend a lot of time studying for the FL bar exam and CPA exam, plus a whole lot of money, just to get licensed there without a job in hand. And I will get no job out-of-state without those licenses, so I am in a catch-22 due to the State licensing requirements.

Posted by TaxLawyer | Report as abusive

Economists seem to think that structural unemployment is entirely about mismatch. What if jobs are simply being eliminated entirely? This has certainly been happening in manufacturing. The US is still the world leader in manufacturing output; we just don’t have the jobs because manufacturing has automated. Globalization can have nearly the same impact as technology, especially in cases like service offshoring.

A second point is that structural unemployment will CREATE cyclical unemployment…because if you lose your job because of technology (or skills mismatch) then you obviously will buy less coffee and less yoga….right?

Check out this book: The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future. (Free PDF at http://www.thelightsinthetunnel.com)

This book explains what economists seem not to understand. The impact thus far may be difficult to detect, but I think in the future it will become very obvious. Almost every sector will be hit heavily in the future.

Posted by Robert287 | Report as abusive