Cyclical vs Structural Unemployment part N
Kevin Drum stresses the very sound point that even if part of current unemployment is structural, we should stimulate to get rid of the part which is cyclical. I don’t have a serious disagreement and choose to debate his guess as to the level of structural unemployment for the sake of debating.
“The “normal” unemployment level is about five points less than it is today. I wouldn’t be surprised if perhaps three of those points are cyclical and two are structural.”
He agrees with Annie Lowrey who presents the following analysis
The unemployment is cyclical and structural. Most sectors have suffered from the turndown, but job losses are concentrated in some industries: In residential construction, they are down 38 percent since 2006. (Between Aug. 2007 and Dec. 2009, unemployment in construction quintupled from about 5 percent to about 25 percent.) In health care and education, however, jobs are up.
This analysis is accidental theory. Between the first sentence and the second, there is a theoretical argument that the cycle has the same effect on log employment in each sector. This argument makes no sense. More after the jump.
I know it is not wise to argue with an “I wouldn’t be surprised” but their approach to measuring cyclical unemployment is completely incorrect. Lowrey identifies the cyclical component by assuming that around the cycle percent changes are equal. Therefore a much much larger percent change in construction than in health is not cyclical.
In fact, the amplitude of the cycle in log employment is not the same in each sector. Some sectors are very cyclical (always go down a lot in recessions) others are almost acyclical. A correct estimate of how much unemployment can be eliminated with fiscal and monetary policy requires an estimate of the effect of fiscal and monetary policy on log-employment by sector. The assumption that this is necessarily equal is an accidental theory — a very strong and plainly false assumption which is made by people who think they can just look at the data without theory.
This is the topic of one of my very rare contributions to the actual economics literature
The practical relevance of the decomposition is due to the fact that it is argued, that, if unemployment is due to miss-match, then a general stimulus will lead to labor shortages in some sectors. This would lead to inflation. As Drum notes this is not a problem at the moment. However, let’s imagine a stimulus powerful enough to drive unemployment down to 7%. Does anyone really think this would create (much more of) a shortage of workers in health care ?
Why would demand for health care increase much (as a percent of current demand for health care). 85% of people are insured. Much of the effect of the recession is people moving from private insurance to Medicaid. There isn’t a big cycle in the number of uninsured and there is little reason for demand for care by the insured to shift with aggregate demand. Even the uninsured demand health care in ERs, then go bankrupt. Recall the HCR debate.
Now how about residential construction. Does anyone really think that no construction workers can shift from residential to commercial construction ? Is there any reason to think that an increase in employment which were to drive the unemployment rate down to 6% would cause labor shortages anywhere ?
mmckinl that is not the conventional definition of the word.
By the standard definition, structural unemployment includes workers who have really given up on looking for jobs (but don’t say so) as well as workers whose skills don’t match any available jobs.
Basically if unemployment is all structural then firms have a lot of trouble finding workers to fill vacancies.
Yes I absolutely agree and should have said so in my post.
Wouldn’t it be structural if there was a sea change in the dynamics of the economy itself? With lower consumer spending set to persist perhaps years, as in Japan, then the actual size of the work force compared to the GDP will down size …
I think it works differently depending on skill set and type of job. For instance, economists can get a job anywhere in any hot industry because they know everything. A janitor can get a job at a bio-tech company because a mop is a mop. I my case I spent my career swinging like a monkey from vine to vine mainly because there was a small overlap in my work experience and education with the next vine I was jumping for. Then after I figured out what job I was training for, next came my re-tooling. That was the part of the job I wasn’t getting paid for.
I think Ross Perot was right in that debate from 1992 about the giant sucking sound and global wages equalizing at $6/hr.
I think the Clinton boom of 1995-1999 was partially enjoying the initial gained efficiencies of shipping all our jobs overseas — cheaper stuff for everyone.
I know the 2003-2007 recovery happened thanks to the addition of $5T of new household debt — we tried to borrow our way to prosperity, and we would have succeeded if it weren’t for those meddling kids.
Ten years ago the national debt was $8T less, too.
People looking at percentage points of structural vs. temporary unemployment don’t understand that the last 10 years of the economy were a debt-given mirage and aren’t coming back.
This is the end game of Monopoly, and we’re heading into a repeat of the 1930s.
Have a nice day.
It is doubtful that labor in the construction industry should go back to levels prior to the financial crisis given that the housing bubble fueled much of that demand. Right now we have excess inventory to absorb which will take quite some time, and after that inventory is cleaned up demand for new housing will be much lower than it was.
When considering what is a normal level of unemployment it is worthwhile to consider that employment in this country has been fueled by unusual events for the last couple decades, the IT sector in the 90s and housing after the turn of the century. I suspect that in the absence of such events our unemployment levels would be much higher.
“This is the end game of Monopoly, and we’re heading into a repeat of the 1930s.”
Keep dreaming pal….If we get off that easy….it will be miracle. Back then other countries left us alone, at least up intil 1941. This time around we are going to get kicked while we are down. The America people are too spoiled to be able to handle what is coming our way.
It will be a lot of fun to watch all the bleeding hearts in this country get converted though! 🙂
Good to see you here again. I always liked reading your posts. In Riethem Germany on the 14th of September and will remain there until Oct. 1. Not sure where you are now.