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.