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Structural Unemployment.

A stickier problem: points out that there structural unemployment is compounding America’s economic woes therefore policymakers must do more than wait for economic growth.

This focus on stimulus is understandable. America’s economy is still operating well below its potential and there is little doubt that most of the rise in unemployment is the direct result of this. But unemployment is high for other reasons too—ones largely neglected in the current debate. Thanks to the scale and nature of the housing and financial bust, the labour market has almost certainly become less efficient at matching the supply of jobseekers with the demand for workers.

People saddled with mortgages worth more than their homes are less able to move in pursuit of new jobs. The skills of those out of work—disproportionately low- and medium-skilled men in construction and manufacturing—may not be those that employers now need. Extensions of unemployment insurance by Congress have been necessary but have also reduced incentives to seek work quickly. And long periods of joblessness in themselves make people less employable. All this erodes America’s famed flexibility.

Getting the to-do list right is trickier, not least because misguided meddling could make unemployment worse. But two avenues seem worth pursuing. The first is a more determined effort to help those trapped in “negative equity” to restructure the mortgages on their homes—an area where the Obama administration has been notably timid. The dire figures for house sales during July, released this week, show how urgent this is. Legal changes, such as a revision to the bankruptcy code that allowed judges to reduce mortgage debt, could help. The second line of attack is to overhaul schemes that help workers retrain and encourage them to search for work. That need not mean more spending (though America does spend a lot less than other rich countries on such “active” labour-market policies). The bigger problem is that existing schemes are fragmented and often ineffective.

I’d just add that providing incentives to for people to move to where there are jobs is a good idea, albeit politically fraught. It would be cheaper in the long run as there will be fewer people receiving funds from the government.

For more see:

Is the Unemployment Problem Cyclical or Structural?:

As I noted in a previous post, economists define three types of unemployment: frictional, structural, and cyclical:

Frictional unemployment is defined as the unemployment that occurs because of people moving or changing occupations. Demographic change can also play a role in this type of unemployment since young or first-time workers tend to have higher-than-normal turnover rates as they settle into a long-term occupation. An important distinguishing feature of this type of unemployment, unlike the two that follow it, is that it is voluntary on the part of the worker.

Structural unemployment is defined as unemployment arising from technical change such as automation, or from changes in the composition of output due to variations in the types of products people demand. For example, a decline in the demand for typewriters would lead to structurally unemployed workers in the typewriter industry.

Cyclical unemployment is defined as workers losing their jobs due to business cycle fluctuations in output, i.e. the normal up and down movements in the economy as it cycles through booms and recessions over time.

In a recession, frictional unemployment tends to drop since people become afraid of quitting the job they have due to the poor chances of finding another one. People that already have another job lined up will still be willing to change jobs, though there will be fewer of them since new jobs are harder to find. However, they aren’t counted as part of the unemployed. Thus, the fall in frictional unemployment is mainly due to a fall in people quitting voluntarily before they have another job lined up.

But the drop in frictional unemployment is relatively small and more than offset by increases in cyclical and structural unemployment. One of the big questions right now is whether the US economy is suffering, for the most part, from structural or cyclical unemployment. If it’s cyclical, then there’s a good chance that government intervention can help. If it’s structural, i.e. a decline in automobile production and manufacturing more generally, a decline in home construction, and a decline in the financial industry all of which free workers that need to be absorbed elsewhere in the economy, there’s less that can be done and some do not think that government can do much at all about this type of problem (though as I note below, I disagree). Thus, the debate is between those who say our current unemployment problem is largely cyclical and hence we need more government action, and those who say it’s structural and hence there’s very little that government can do. We will just have to wait for the structural changes to take place, and that takes time.

I don’t think this debate can be answered by moving close to the polar extremes and declaring it’s mainly a structural or cyclical problem. For me, it seems obvious that part of the problem is structural. The real question is how large the structural component is and what can be done about it. But no matter how large it is — take a very liberal estimate of the size — I don’t think there’s any way to deny that there is a substantial cyclical component on top of it that demands government action. It’s true that the size of the government action to offset the the cyclical downturn should be connected to the size of the cyclical unemployment problem, but the problem is big enough that politicians won’t come anywhere near to overdoing it. The most optimistic view of what Congress might do would still leave them short of what is needed. We don’t know the exact structural-cyclical breakdown, but the cyclical problem is certainly larger than any imaginable Congressional response. So the excuse for inaction based upon the “it’s all structural” claim isn’t persuasive.

What about the structural problem, does government have any role to play, or does it have to rely upon the private sector to solve this problem by itself? Several points on this. First, even if the problem is mostly structural, the government can still provide people with jobs to bridge the gap until the structural changes are complete. To me, this is better than simply extending unemployment compensation since it allows individuals to contribute something (e.g. work on a project the local community needs). And by giving people jobs, or at least government aid through unemployment compensation, we increase aggregate demand and the that helps firms to do better and speeds the transition.

Second, government can ease the structural problem by making it easier for businesses and individuals to relocate. People are understandably reluctant to leave the place they have lived for years and years, but government incentives to relocate (tax breaks, subsidies, etc.), can help. So can efforts to provide individuals in communities suffering from high unemployment with information about where job prospects are better, as can retraining programs (though these aren’t always as effective as hoped). In a deep, widespread recession places that need workers may be hard to find, but not always and knowing where there are better opportunities for employment can be helpful. Businesses can also be induced to relocate through tax and other incentives, though the tax competition that accomplishes this may strip local governments of needed tax revenue, so I’d prefer these programs originate at the federal level. And there can also be government encouragements to speed the investments that are needed to complete the transition.

But the main things I want to emphasize are that no matter how large the structural problem is, cyclical unemployment is also a big problem, so the claim that government is powerless because it’s all structural doesn’t hold.  And the claim that the existence of a structural problem means there’s nothing the government can do is also incorrect. If nothing else, the government can help workers during the transition. In addition, though the opportunities here are more limited, there are also things the government can do to make the transition happen sooner rather than later.

and Can Government Help with Structural Unemployment?:

Minneapolis Fed President Narayana Kocherlakota and others have been arguing that there is little the Fed can do about the unemployment problem because it is mainly structural in nature. I don’t agree with that conclusion. I think there’s a large cyclical component no matter how the data are cut, but let’s focus on the structural component for a moment.

The first point is that the rate at which the structural transformation will take place depends upon the rate of business investment. Long-term real interest rates — the focus of quantitative easing — can certainly be used to influence the rate of investment. Minimally, the Fed needs to what it can to prevent real rates from increasing due to falling inflationary expectations. The cheaper it is to make the transformation, something the Fed can influence, the faster it will happen.

Second, while we wait for the structural transformation to take place, fiscal policy can be used to bridge the gap. Suppose that the local community decides to tear down a school and build a much improved version in its place. Should we send all the students home on vacation while the new school is built, teachers too — they would be structurally unemployed and need unemployment compensation — or should we build  temporary facilities to use while the new school is being built? Fiscal policy can be used to create temporary opportunities for unemployed workers while the structural transformations are taking place. It’s true that structural change can prolong the adjustment period, but that means there’s more of a need for such temporary facilities that provide employment — more of a need for government help — not less.

Third, there are other things fiscal authorities can do to encourage structural transformations, e.g. investment tax credits, incentives to bring new businesses and the unemployed together by moving labor to the jobs or encouraging new businesses to locate where unemployment is highest, retraining programs, etc.

Finally, I am convinced that this is primarily a demand problem. Even if you believe that there is substantial structural change that must take place, it’s hard to deny that there is also a deficiency in demand right now. Creating more demand through an additional stimulus package would help to spur demand at businesses leading to higher profits, more confidence, and, importantly, more investment in structural transformation activities.

We have both cyclical and structural problems. We are in a situation where action from both the Fed and Congress could help, and neither alone is likely to be enough, but neither seems inclined to do anything. Both say that if things take a turn for the worse they will, of course, do more, but how bad to things need to get to move them to action? The Fed in particular has acknowledged there is more it could do, it just doesn’t think there’s any need, not yet anyway. Or, it says it’s powerless because the problem is structural — there’s always an excuse to forestall further action. But we don’t need evidence that things are even worse before implementing more aggressive policy, there’s little to suggest we are on the robust road to recovery, things are bad enough presently, and the structural excuse does not let the Fed off the hook. Both the Fed and Congress need to take action now.

Even if you think there should only be action if things get worse, if we wait until we actually see the bad outcome, it’s too late to do much about it due to the lags in the policy process. It takes time to put policy into place, and time for policy to work after Congress of the Fed acts, so ideally policy needs to be acted upon months in advance.

Policymakers keep making this mistake. Things look tenuous — and there are plenty of worrisome signs right now — but then they make excuses, adopt rosy scenarios, and find other ways to wait until they actually see the bad outcome before moving to action. It’s like covering yourself up after the blow. Or saying you’ll close the barn door if you see the horses running toward it. Who’ll get there first? There’s plenty to suggest that we need to insure against the chance that things will get much worse, or simply stagnate. In any case, we need to try to offset the problems we already have. But yet, there’s no action. It’s frustrating to see conditions so bad, with signs they could get worse, and have no sense of urgency from policymakers.

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