Excuses, excuses: The problem with ‘structural’ explanations for U.S. unemployment
It’s an arcane economics debate with all-too-real implications for U.S. monetary policy: Is high unemployment primarily the result of “structural” factors like skills mismatches and difficulties relocating, or is it largely due to insufficient consumer demand in a weak economic recovery?
The answer to that question may help determine how much further the Federal Reserve is willing to push its unconventional measures to bring down the jobless rate, currently stuck at 8.2 percent. If unemployment is cyclical, economists say, it would be more likely to respond to looser monetary conditions.
Research from Berkeley professor Jesse Rothstein, published earlier this year and featured recently on the National Bureau of Economic Research’s website, represents one of the most thorough academic efforts to date to discredit the structuralist version of events.
Four years after the beginning of the Great Recession, the labor market remains historically weak. Many observers have concluded that “structural” impediments to recovery bear some of the blame. This paper reviews such structural explanations. I find that there is little evidence supporting these hypotheses, and that the bulk of the evidence is more consistent with the hypothesis that continued poor performance is primarily attributable to shortfalls in the aggregate demand for labor.
Jeffrey Lacker, the Richmond Fed’s hawkish president, is a key proponent of the structural view, arguing this week that the U.S. unemployment rate is about as low as it can be right now without generating undue inflation pressures. In a May speech in Greensboro, North Carolina, Lacker made the case for why monetary policy was powerless to address the ailing jobs market despite the central bank’s dual mandate of maximum sustainable employment and low inflation.
In recent months, many of our business contacts have reported that although demand is beginning to increase, they are unable to respond as quickly as they would like due to an inability to find skilled workers. […]
The rise in long-term unemployment across a wide range of occupational and industry groups provides additional evidence that mismatch is an important factor restraining labor market performance.
Rothstein, however, begs to differ. He says the broad rise in unemployment in a wide array of industries points to a cyclical downturn, since a structural problem might be more confined to crisis-affected sectors like housing and construction.
The unprecedented rise in long-term unemployment, which some have pointed to in support of the structural unemployment hypothesis, turns out not to support that hypothesis after all. The extended period of labor market weakness that we have seen, combined with long-run demographic and labor market trends that predate the current recession, explains all or nearly all of the rise in the long-term unemployment share relative to past downturns, leaving no need to appeal to recent structural factors for an explanation
As for the notions that jobless benefits are keeping workers from looking as hard as they might, or that a weak housing market has made it harder for people to relocate for new jobs since they have more trouble selling their property – these are not major factors, says Rothstein:
The most plausible sources of structural problems – labor supply disincentives due to conditional transfers like unemployment insurance or geographic immobility due to housing market frictions – do not appear to be quantitatively important.