Opinion

The Great Debate

Five years after recession, we still can’t agree on what causes joblessness

By Allison Schrager
August 28, 2013

Although the Fed announced months ago it is considering pulling back its purchase of assets, unemployment remains historically high. What, if anything, can the government do to get people back to work?

In order to determine the right policy prescription, first we must diagnose what’s causing unemployment. Is the high unemployment due to low demand from the recession, known as cyclical unemployment, or has the world changed and jobs are not coming back, known as structural unemployment? Most likely it’s both. It is impossible to know precisely how much new unemployment is structural and how much is cyclical. This uncertainty has sparked a contentious debate about the nature of unemployment that has been raging since the start of the recession, and lately seems to be hardening into absolutism. The cyclical camp fears that acknowledging an increase in structural unemployment will be used as an excuse to support tightening monetary policy, and gives the government a pass on fixing unemployment. But actually, saying all unemployment is cyclical is what lets the government off too easy. Structural unemployment can be helped with policy, but the solutions take more political will, creativity and leadership. We can lower the structural rate by changing tax incentives to encourage mobility, both job and location, and building a wealth cushion to finance productive job transitions.

If unemployment is cyclical then all the government has to do is reignite demand. For example, if people aren’t buying much then firms don’t produce or sell as many goods, and therefore employ fewer people. Typically to compensate for recessions, monetary policy makers lower interest rates. This encourages people to buy more or firms to expand. That creates more demand and firms hire again. If the Fed creates more inflation, which lowers real wages, then firms can hire more cheaply.

Or the problem might be structural. Structural unemployment is often poorly understood because economists use several different definitions for it. It is often called the natural or permanent rate of unemployment — though there is nothing permanent about it; it varies over time. It is also known as the non-accelerating inflation rate of unemployment, meaning rates can be lowered and inflation created, but there will be little impact on unemployment. If all unemployment is structural and the Fed tries more expansion, all you get is high unemployment and more inflation.

An increase in the structural unemployment rate may be caused by several different factors. Employers may want to hire people, but can’t find people with the necessary skills. Or if unemployment benefits are higher than what people can earn working, some people will prefer not to work. That is probably not a large factor in America today, but it explains why some European countries like France and Germany had a higher structural rate than the U.S., more than 8 percent before the crisis. Labor market reforms in Germany, which enhanced flexibility and encouraged work, are credited with lowering its structural rate. Another factor could be if employers must pay higher compensation, including salary and benefits, than they’d like to their workers. Geographic immobility, if job seekers can’t move to where the jobs are, is another contributor. The definition can also be broadened to account for economic well-being. Suppose a laid-off manufacturing worker can only find a job in a fast food restaurant or part-time contract work. He no longer counts as unemployed, but a structural change undermined his economic security and an otherwise productive worker is underemployed.

There exists very compelling evidence that cyclical unemployment is present. Inflation is low, yet there’s still high unemployment. That suggests there is more that monetary policy can do. Last summer at the Federal Reserve’s Jackson Hole conference economist Edward Lazear presented strong evidence that a large component of unemployment was demand driven. Unemployment during the Great Recession was mostly in industries associated with structural change, manufacturing and construction. But since 2009, many people in these industries have found new work. Alas, we don’t know what industry the new jobs were in and why unemployment remains high, especially when you count discouraged people who dropped out of the labor force. Lazear also found that industrial mismatch, the ratio of vacancies to unemployment across industries, increased at the start of the recession but fell as the recession dragged on. He claims the changing ratios show that, since the recession, jobs didn’t disappear in some industries while new jobs in other industries couldn’t be filled. One former structuralist champion, Minnesota Fed President Narayana Kocherlakota, conceded that he had underestimated the extent of cyclical unemployment, but with an important caveat.

I should be clear — it’s not that I used to think structural factors were the sole source of elevated unemployment, and now I think they don’t matter. It’s more nuanced — the evolution of the data has led me to put less weight on structural factors than I did earlier in 2012.

This is an important point: the existence of cyclical unemployment doesn’t mean there’s no change in the structural rate, too. The economy has been experiencing a structural change for decades. New technology and more globalization have changed the nature of work and the kind of skills American employers demand. Economist Josh Lehner believes that in order to understand structural shifts you need to look at employment by occupation, defined by on-the-job skills, not industry. He observed that manual jobs, such as traditional factory work, disappear during recessions and new job growth has been concentrated in high or low-skill jobs; this is often described as a “hollowing-out” of middle-skill occupations.

The economic factors that eliminated many middle-skill jobs have been unfolding for decades. But they didn’t cause a gradual increase in the structural unemployment rate, as economists would expect. What happened was large discrete change following each recession. That’s because cyclical and structural forces can interact. During recessions already vulnerable firms are more likely to close or have layoffs due to weak demand. The layoff may have been caused by a cyclical factor, the worker is structurally unemployed because his skills are harder to sell and his old job isn’t coming back.

Research by economists Nir Jaimovich and Henry Siu found that 92 percent of job loss in middle-skill, routine jobs occurred during recessions, and many of these jobs never came back. Middle-skill job loss can account for most of the unemployment in each recession. Middle-skill jobs accounted for 87 percent of job loss in the 1991 recession, 91 percent of job loss in the 2001 recession, and 95 percent in the Great Recession. The concentration of job loss in middle-skill occupations explains why, starting in the 1990s, jobs growth was slower during economic recoveries. Economic growth rebounded, but the unemployment rate took longer to come down.

The debate about the nature of unemployment has gotten contentious, in part from slippery definitions of structural unemployment. But if it can be defined as unemployment that won’t be lowered by monetary policy and reflecting an underlying structural change, it’s reasonable to believe that there’s both deficient demand and a structural rate increase. That leaves plenty of work for policy makers.

There’s more scope for the Fed to keep rates low and ensure capital is available to worthy, job-creating, small firms. To fix structural unemployment, the prescriptions are even harder to implement. Thoughtful and well-designed fiscal expansion may provide work and training to laid-off middle-skill workers. Or if health and retirement benefits were not tied employers, American firms could better compete with foreign counterparts. Changing the compensation structure, perhaps by eliminating the tax deductibility of health and retirement benefits, would also ease job-lock that keeps people stuck in less productive jobs simply to keep their benefits. That would make the labor market more fluid and able to absorb laid-off workers.

There also could be better policies to encourage geographic mobility. Right now many people have economic incentives to buy a home, but few to maintain a stock of liquid saving. If you suffer a setback and must move or retrain, that requires cash. According to 2009 survey data, half of Americans believe they probably couldn’t come up with $2000 in a month if they had to. If we changed tax incentives there would be less concentration in a levered, illiquid, single asset — housing, which discourages mobility — and more in liquid saving assets, which finance productive transitions. Home ownership may be a worthy objective, but it’s hard to justify encouraging people to keep all their wealth in a single, illiquid asset.

These are harder policy prescriptions than expansionary monetary policy and will take more time to work. But unless we accept that post-recession unemployment is a complicated, nuanced problem that requires innovative and thoughtful solutions, on both the monetary and fiscal side, it will continue and the structural part will get worse.

PHOTO: Job seekers stand in line to meet with prospective employers at a career fair in New York City, October 24, 2012. REUTERS/Mike Segar

Comments
18 comments so far | RSS Comments RSS

The aggregate categories of unemployment are too often taken for granted as set in stone. Yet the policy implications for treating these types are hugely divergent. Its nice to see coverage of these nuances clearly explained. The debates need to be had.

Posted by Dr.Mabye | Report as abusive
 

you eliminate minimum wage, cut taxes, get rid off unions, get the govt out of the picture, reduce or cut off any welfare program, I can bet you can see unemployment go down fast.

Posted by Doug8528 | Report as abusive
 

We have politicians on both sides saying things like: “People should not have to lose their home, just because they lost their job in these hard times.” Well, if you don’t get another job quick….. you SHOULD lose your home. Unemployment should pay for very basic needs only. Some food, maybe a tent. It should not be a long-term replacement for work, where the government pays your ridiculously overpriced mortgage. In addition, we need to bring back work programs like we had during the Great Depression. CCC, WPA, etc. Unemployed people can move to work camps and be paid with soup and $14 a day. During the Great Depression, it was $1 a day. And people were glad to have it. The work needed in America? Building passenger railways and cleaning up beetle-killed forests in the West. For starters. We are not thinking big enough.

Posted by AlkalineState | Report as abusive
 

Cheap imports are the major factor for domestic unemployment.

If it costs much less to get it overseas, there is not much to do here for the average Joe, but moving boxes around.

Posted by robb1 | Report as abusive
 

Raise import tariffs back to 20%. America was built on that concept. But in the last 30 years, we have let international business groups like the oddly named “U.S. Chamber of Commerce” talk our politicians into a 1% import import tariff. That helps the international businesses sell their junk here. Does not help America make anything.

Posted by AlkalineState | Report as abusive
 

Globalization and automation have done significant structural damage to the USA. Enough that it (the USA) actually perished and has been replaced by the USCA. Global corporations have a completely different agenda than the employees located near the home offices (the USCA). As far as they are concerned mobility within the country will do you little good. They have a “Global supply chain” now, and that must be maintained.
So having a mobile work force is just counter productive. You will be provided basic sustenance and housing until technology replaces you with droids. Won’t that be a great and wondrous time? No more complaining employees, no racial or religious strife. Just blissful relaxation.

Posted by tmc | Report as abusive
 

Interesting article but I believe that most of our unemployment is structural. The Fed used up most of its ammunition before we even entered the 2008 recession. U.S. Tax policy that shields overseas corporate profits as long as they are not bought back here (which is to say you use it to build more oversea factories) is the prime culprit. However, the long term trend is that middle class factory jobs that don’t require a good education or truly skilled work are unsustainable in the face of technological progress.

“There’s more scope for the Fed to keep rates low and ensure capital is available to worthy, job-creating, small firms.” Low rates are not the barrier here. Megabanks are still gambling funds on derivatives that should have been loaned to “worthy, job-creating, small firms” The Fed can’t fix this until Glass-Steagall is fully reinstated.

“There also could be better policies to encourage geographic mobility.” How about tax deductions (capital gains loss) for losses on your home?

Posted by QuietThinker | Report as abusive
 

.

It is really very, very, very, simple.

It is quite clear the current administration’s
policies are creating unemployment at a tremendous
rate.

It is a triple whammy:

1. Bernake prints free money for corporations to use
on robotics and other “employee” saving computer and other technological devices.

They could not afford this without zero interest.
They would not do it, if the equipment was so inexpensive due to zero interest.

Bernake then scratches his head and wonders why employment decreases with zero interest rates ? Crazy.

2. At the same time Obamacare makes the cost of the
employee rise, as does all the talk of increasing
the minimum wage.

3. Add in Globalization and there you have it.

You can’t pay someone in India .50 an hour to sew
a skirt, and pay someone in CA $ 10.00 to sew a skirt,

and then add in pollution control and many other additional expenses in CA that do not exist in India.

and expect the skirt in CA to cost less.

Again, it is really very simple.

.

Posted by Alexaisback | Report as abusive
 

I find it amazing how ivory tower academics can only spew forth drivel. Unemployment is a symptom. A symptom of what? A symptom of lack of consciousness from the public about what the business and political leaders they voted for have actually been up to for the last twenty years. They have been stealing as follows: through QE from savers, through bailouts from taxpayers, through national debt from future taxpayers, through offshoring from workers, through tax havens from the fiscus, through military interventions from mothers. Time to wake up.

Posted by BidnisMan | Report as abusive
 

Let me rewrite your article as an autopsy report: Deceased male, white, 73. Cause of death – debatable. The deceased was wearing his heart rate monitor which shows a heart attack when you download the data. But a great many studies and professors disagree with this analysis as the deceased was driving his car at the time of the heart attack and crashed it into the barrier at speed, causing his spinal cord to sever. However, new research (paid for by Vested Interests Inc.) show that that since the deceased was 73 he was over the average life expectancy for a smoker and so the heart attack was just nature taking its course. There is much debate in the ivory towers as to the real cause and we won’t have consensus anytime soon. Perhaps not worth mentioning was the two bullet holes in the deceased chest as the policeman who discovered them has no Ivy League cred. All I can say is we will probably never know what killed him. So sad.

Posted by BidnisMan | Report as abusive
 

Corporate America’s voracious appetite for cheap labor is what causes joblessness. They have been shipping every job they possibly can out of the country for the last 30 years and now they are on a quest to turn every job left in the country over to cheap labor. That’s why the immigration laws haven’t been enforced and that’s why the immigration bill just passed in the Senate allows 300,000 foreigners a year to enter the country legally on H-1B visas to fill America’s high tech jobs while qualified Americans are passed over. High tech companies want compliant, uncomplaining cheap labor, people who won’t ask for raises, who will work long hours and won’t complain when they don’t get paid for overtime because if they get fired they have to go back to their home country. It’s all about cheap labor.

Posted by Des3Maisons | Report as abusive
 

“We can lower the structural rate by changing tax incentives to encourage mobility, both job and location, and building a wealth cushion to finance productive job transitions.”

It took a lot of intervening words to get to the point (sort of) that the biggest sudsidy ever invented for federal and state governments is the mortgage interest deduction. Not only is this completely contrary to the notion of a mobile work force, it provides massive support to the mortgage industry and the Wall Street Casinos that gamble on mortgage-backed financial instruments rated triple-A by Buffett’s Moody’s when they should be rated JUNK.

Of course, the Plutocrats, the “job creators”, have made out handsomely from their bribes to support this creaky system that continues to expand their portfolios. The One Percenters Club has huge incentives to keep the employment of the Pee-Ons, the 99%, as low as possible.

The author seems to refer to the Great Recession, called the Third Depression by economists like Nobel Laureate Paul Krugman, as if it is ongoing, which it is if the breakeven point in GDP growth that all bona fide economists use to account for labor pool growth from population growth. This rate was set officially @ 2.75%, yet most pundits and reporters completely ignore it, probably because it interferes with their pre-conceived ideas regarding recession/depression derived from the Plutocracy.

Then, we have the phony, misleading “official” unemployment rate and the insulting notion that because those who no longer receive unemployment benefits are now no longer in the labor pool and no longer looking for work. Nonsense! How about the participation rate that indicates that there are millions of people who held jobs six years ago, but no longer do. Isn’t that close to the REAL unemployment rate?

Posted by ptiffany | Report as abusive
 

The world is undergoing structural economic “sea change” of unprecedented magnitude that is likely irreversible. There are two primary drivers of such ongoing change.

True “globalization” has become possible because, for the first time in human history, our world is substantially at peace. Such warfare as happens is of limited scope and duration and so does not materially affect air, land and ocean commerce. It does not substantially threaten or discourage the relative security of long term private/government investment.

It has thus become possible and profitable for companies throughout the world to design products of great technical sophistication anywhere. They can then contract for production or build plants for this purpose wherever the necessary combination of labor skills exist at the best price, and change as that changes.

Products can then be transported inexpensively without interference wherever product demand exists in whatever quantity consumers demand. The fact of summer is winter (and vice versa) between northern and southern hempspheres has had huge economic benefit for international agricultural markets. The economics of the extraction, refining, distribution and export of natural resources and related products have multiplied.

Anyone over the age of fifty can easily see that millions and millions of good-paying middle class jobs with a “future” such as Girls Friday, Secretaries, Administrative Assistants, stock clerks, bookkeepers, draftsman, designers, Project Coordinators, and the like have disappeared. Not “offshored”. Not “outsourced”. They are just GONE. FOREVER! Look around and think about that.

Why? Fewer and fewer people accomplish that which must be done, and do it at less cost; a process beginning around 1980. Preexisting tax incentives and disincentives have not been modified to mitigate directly related structural unemployment? Why? It seems because no one sees the overall perspective.

Only an ostrich with head in sand could look at the imbalance between what the United States is spending versus what it’s tax revenue and not support tightening monetary policy. Those who argue for higher taxes fail to understand that tax revenue is the crack cocaine of government.

Increasing that flow before “kicking the excess spending habit” is like trying to put out a fire with gasoline. The Fed has been debasing the dollar by running the presses 24/7 ceaselessly and it is fiddling the numbers to hide resultant higher unemployment and increasing inflation.

“We can lower the structural rate by changing tax incentives to encourage mobility, both job and location, and building a wealth cushion to finance productive job transitions.” Balderdash. Most people like to “put down roots”, not live like Gypsies.

“Employers may want to hire people, but can’t find people with the necessary skills.” Yup. More needs to be done here with priority. America’s parents and UNION educational establishment are not producing the necessary “informed and capable” citizens needed. A majority are not even acceptable to the standards of a all-volunteer military.

“…if unemployment benefits are higher than what people can earn working, some people will prefer not to work. ” Wonder why? And it also follows that when Disability benefits are generally equal to what a low wage worker takes home there is ever greater employment for lawyers to get the able-bodied on Disability. Much nicer to sit home and watch TV and drink beer instead of working!

Edward Lasear…”Unemployment during the Great Recession was mostly in industries associated with structural change, manufacturing and construction. He claims the changing ratios show that, since the recession, jobs didn’t disappear in some industries while new jobs in other industries couldn’t be filled”. Does NOT make sense to me.

“Economist Josh Lehner believes that in order to understand structural shifts you need to look at employment by occupation, defined by on-the-job skills, not industry. He observed that manual jobs, such as traditional factory work, disappear during recessions and new job growth has been concentrated in high or low-skill jobs; this is often described as a “hollowing-out” of middle-skill occupations.” He’s right. But the hard truth is that America HAS NO MONEY to “…provide work and training to laid-off middle-skill workers.”

In a world of SEVEN BILLION (and exploding) people, YES, we need to changed tax incentives. But for businesses, not individuals. Economists must understand that they can no longer look to “more and more consumers” to provide economic growth and prosperity. That train has left the station.

They need to figure out how the various sovereign states can educate and provide suitable education, productive employment and retirement for ordinary citizens WITHOUT WAR. There must be a common, sustain ed and successful effort to reduce the world’s “permanent population” DOWN to whatever level is acceptable and sustainable. Nobody promised easy!

Posted by OneOfTheSheep | Report as abusive
 

@OOTS, well said as usual.
I would add that over the last three to four decades, we not only automated away a significant number of jobs permanently, we also added several billion people to the workforce via globalization. Even more will join as the western social concepts expands across those billions, adding more women to the workforce. I have absolutely no faith whatsoever in the current crop of ordained economists. They seem to be stuck in the “resist change at all cost” mentality.
We need to start planning on new forms of currency and prepare for huge shifts in what “work” means. We do not require all physically capable people to work anymore. The concept that you must work to pull your own weight is just not true anymore. Very soon those “droids” on the science fiction movies will be a reality. We need to have a class of people that do not work at all and another class that work at what is now considered part time. It will be very difficult to transition to that. Perhaps we could start by shortening the “work week” to 25 or 30 hours for everyone to increase employment? At least start talking about population control?

Posted by tmc | Report as abusive
 

“They need to figure out how the various sovereign states can educate and provide suitable education, productive employment and retirement for ordinary citizens WITHOUT WAR.”

I agree. But under the model of globalization, the need for sovereign states is eroding. Borders are simply a market distortion now. A truly free global marketplace has producers and consumers. That’s it. Our border with Mexico is porous because big business WANTS it porous. You can’t send a Hotel or a roofing job overseas. But you CAN bring the cheap labor here. Con-Agra has buses set up on the border to bring workers in for its meat packing plants. Sovereign states are becoming less relevant. Business is taking over the world.

Posted by AlkalineState | Report as abusive
 

@AlkalineState,

A “truly free global marketplace” would destroy many existing economies, thus the ongoing necessity for negotiations as to the value of the various currencies. Borders divide economic interests and always have.

Those in charge of China and Russia have much more to fear from the “truly free global marketplace” than we here in the U.S. Even we as the “world’s largest consumer” without whom NO ONE can prosper must act with appropriate economic consideration and restraint.

Business cannot function outside of the protections, conventions and stability governments provide as an alternative to anarchy. We just have to remind them sometimes.

Posted by OneOfTheSheep | Report as abusive
 

@OOTS, this is the USCA, corporations ARE the government. @AlkalineState is right, national borders are a market distortion and a general pain in the butt for Global corporations. As I’ve posted before, within the next decade the global corps will attempt taxation autonomy. They may even succeed at it.

Posted by tmc | Report as abusive
 

To create jobs people must have enough money to BUY. When people start buying things, there would be more demands for more manufactured goods. Minimum wage must go up to $10 and job security.

Apple etc prefer to keep the billion $ profit in Ireland or Bermuda due to US tax. Create a tax concession for companies reinvest in the US. Slap a higher tax for those who keep their capital cash overseas for over 12 months.

Posted by croc8 | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •