MacroScope

Excuses, excuses: The problem with ‘structural’ explanations for U.S. unemployment

July 11, 2012

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.

For more interesting reading on the subject see the Atlanta Fed’s macroblog, Paul Krugman and Peter Capelli.

Comments
4 comments so far | RSS Comments RSS

Why is it that mainstream conomists never acknowledge the issue of the 10 million fake jobs spawned by the credit/housing bubble? That was abnormal. With the fake jobs vaporized by the crash, today’s employment levels are normal. What went before wasn’t. Mainstream conomists are crawling through the sand toward the mirage of the desert oasis that doesn’t exist.

Posted by LeeAdler | Report as abusive
 

I can’t believe that the authors ignore the major “STRUCTURAL” problem of our time. In a net zero sum world globalization has lowered the unit cost of labor, displacing the low skilled jobs to the development world economies, like the BRICS. These economies have shifted unprecedented numbers of people from extreme poverty to poverty and to middle class status. Since the top classes in the developed world have been able to defend themselves, either productively or by financial speculation, and the lower classes had nothing to loose, obviously the wealth displacement and the job displacement has occurred from the middle/low classes of the developed societies to the low classes of the underdeveloped ones.
Since in the US skills are indeed associated with income, the middle low classes where the ones with middle/low skills, thus the most affected. This obviously creates the phenomenon that middle/low skills workers are plentiful, but the high skills workers are missing. Giving that the job transfers from the developed to the underdeveloped world occurred first for the middle/low skills jobs.
The problem for the developed economies is that the underdeveloped world is becoming more and more developed and pushing with all its might to create middle/high skills jobs, thus creating pressure in the middle/high class. That added to the technology stealing that is going on through hacking is creating an explosive environment for democracies worldwide.
Failing to consider this structural problem of wealth redistribution in a globalized environment, creates a short sighted analysis of the biggest problem that humanity has faced in its history.

Until next time,
Engineer

Posted by spine001 | Report as abusive
 

how about economists do some real work, and go out and put a grad student in a plant or office, and sit in with HR for 100 hires
no, that would be empirical data, much nicer to sit in your office and apply incomprehensible statistical techniques to data you can download…way cooler then actually working

Posted by ezra567 | Report as abusive
 

“… 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.”

In other words, no jobs. Tell me something I don’t already know.

Posted by cygnus61 | Report as abusive
 

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