Anatomy of the Global Economy
The Varieties of Unemployment
J. Bradford DeLong
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BERKELEY – We hear from surprisingly many quarters these days that governments in Europe and North America, and their central banks, should give up on the expansionary policies they have pursued to try to create jobs. The high unemployment currently afflicting the North Atlantic, critics of government stimulus maintain, is not cyclical but “structural,” and thus cannot be alleviated by policies that boost aggregate demand.
Let me be the first to say that structural unemployment is a true and severe danger. When people who in other circumstances could be happy, healthy, and productive members of the workforce lack the skills, confidence, social networks, and experience needed to find work worth paying for, we obviously have a problem. And if unemployment in Europe and North America stays elevated for two or three more years, it is highly likely that we will have to face it. For nothing converts cyclical unemployment into structural unemployment more certainly than prolonged unemployment.
But is that true today? Does it look right now as if the biggest problem facing the economies of Europe and North America is structural unemployment? It does not.
Let us remember what structural unemployment looks like. The economy is depressed and unemployment is high not because of slack aggregate demand generated by a collapse in spending, but instead because “structural” factors have produced a mismatch between the skills of the labor force and the distribution of demand. The structure of demand by consumers is different from the jobs that workers are capable of filling.
For example, suppose that you have many workers qualified and skilled to work in construction, but households have decided that their houses are more than large enough, and wish to fill them with manufactured goods. This would produce structural unemployment to the extent that the ex-construction workers could not do things in manufacturing that would make it worthwhile for manufacturing firms to hire them.
In that case, we would expect to see construction depressed: firms closed, capital goods idle, and workers unemployed. But we would also expect to see manufacturing plants running at double shifts – the money not spent on construction has to go somewhere, and, remember, the problem is not a lack of aggregate demand. We would expect to see manufacturers holding job fairs, and when not enough workers showed up, we would expect to see manufacturers offering higher wages to attract workers into their plants, and then raising prices to cover their higher costs.
The size and duration of the excess unemployment of ex-construction workers might be substantial and long lasting. It might require significant time to retrain construction workers and plug them into social networks in which they become good manufacturing workers. We might see prolonged and high unemployment in the construction sector, and in regions that had seen the biggest previous construction booms.
But depression in the construction sector and unemployment among its ex-workers would be balanced by exuberance in the manufacturing sector, rising prices for manufactured goods, and long hours and high wages for manufacturing workers
That is what “mismatch” structural unemployment looks like – and it is not what we have today, at least not in Europe and North America. In the past three years, employment in construction has shrunk, but so has employment in manufacturing, wholesale trade, retail trade, transportation and warehousing, information distribution and communications, professional and business services, educational services, leisure and hospitality, and in the public sector. Employment is up in health care, Internet-related businesses, and perhaps in logging and mining.
In the United States, the past three years have seen employment fall from 137.8 million people in July 2007 to slightly less than 130 million in July 2010 – a decline of 7.9 million during a period in which the adult population grew by six million. What we have witnessed is not a shift in demand into sectors lacking an adequate number of qualified and productive workers, but rather a collapse in the level of aggregate demand.
This may well look like structural unemployment in three years. In three years, we may well see labor shortages, rising wages, and increasing prices in expanding sectors, accompanied by high unemployment elsewhere in the economy.
But that is not our problem now. Sufficient unto the day is the evil thereof.
J. Bradford DeLong, a former US Assistant Secretary of the Treasury, is Professor of Economics at the University of California at Berkeley and a Research Associate at the National Bureau for Economic Research.
Copyright: Project Syndicate, 2010.
www.project-syndicate.org
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robdashu 03:13 01 Sep 10
"The structure of demand by consumers is different from the jobs that workers are capable of filling." You state this is a characteristic of structural unemployent; that makes sense.
It may be that they are capable, but not willing to fill these jobs at the prevailing global compensation rate. The rising standard of living in America has tended to raise a larger number of people up from menial work, which nonetheless needs to be done [e.g. agriculture, textiles and clothing, etc.] The difficulty is that our economy's growth has been built on higher level activities [i.e. more complex, requiring larger investment and longer lead times, etc.] that carry different risks from basic production endeavours and are supplementary to our basic needs. We seem to forget that when push comes to shove, we'd rather have food to eat and clothes to wear before we wish for iPods.
manuelcc 04:01 01 Sep 10
Interesting article where the author poses the serious problem of unemployment in the U.S. and EU, which considers the structural and circumstantial.
The underlying issue, which is not the author, is simple: if we increase productivity, keep working the same hours and annual household income does not increase in real terms over the past 15 or 20 years, who will buy the increasing production?
The problem was solved temporarily with the ease of access to the indebtedness of households, businesses and governments, but it is a temporary solution, as evidenced by the current systemic crisis.
Manuel Caraballo Callero
Izadi AG Economist
http://manuelcaraballo.wordpress.com/
http://izadicosultores.blogspot.com/
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Serio artículo en Project Syndicate donde su autor plantea el grave problema del desempleo en USA y UE, que lo considera estructural y no circunstancial.
La cuestión de fondo, cosa que no indica el autor, es muy sencilla: si incrementamos la productividad, seguimos trabajando las mismas horas y la renta familiar disponible no se incrementa en términos reales en los últimos 15 ó 20 años, ¿quién va a comprar la cada vez mayor producción?
El problema se solucionó temporalmente con la facilidad de acceso al endeudamiento de las familias, empresas y gobiernos, pero es una solución temporal, como demuestra la crisis sistémica actual.
Manuel Caraballo Callero
Economista de Izadi AG
http://manuelcaraballo.wordpress.com/
http://izadicosultores.blogspot.com/
shuchang 05:19 03 Sep 10
I agree with the comments by Partha, and am cautious over the emphasis of this article. Yes, the unemployment at this point is not structural in the sense that it’s not in some sectors while others are short of workers with required skills. The author himself rightly adds at the end not a problem ‘for now’. Unemployment now may be cyclical for now, but the gloomy prospect does loom that it takes a long time for the economy and the unemployed will be out of job for the long haul. The risks are high that these people will not be able to fit into a change structure of the economy due to the crisis, or keep up evolving demands even within their own sectors. Thus, prolonged cyclical unemployment will turn into structural unemployment.
shuchang 05:25 03 Sep 10
Many apologies for re-posting for some corrections. I agree with the comments by Partha, and am cautious over the emphasis of this article. Yes, the unemployment at this point is not structural in the sense that it’s not in some sectors while others are short of workers with required skills. The author himself rightly adds at the end that it’s not a problem ‘for now’. Unemployment may be cyclical at this point, but the gloomy prospect does loom that it takes a long time for production to return to pre-crisis levels and the unemployed will be out of job for the long haul. The risks are high that these people will not be able to fit into the changing structure of the economy following the crisis, or keep up with evolving demands even within their own sectors. Thus, prolonged cyclical unemployment will turn into structural unemployment.
HowardA 02:52 10 Sep 10
This article is an interesting academic discussion of structural unemployment, but does not seem to get to the core the current employment problems. As i see it there are two core problems. One is slow growth. The economy grew about 20% this decade compared to a range of 30% to 42% in the prior four decades. The second problem is that the growth that does occur, does not generate a proportionate number of new jobs. In the past decade it took a 11% improvement in GDP to increase employment by 1%. In the prior 4 decades, employment grew 1% for each 1.5% increase in GDP (inflation adjusted). This phenomena is measured as improved "productivity" but it also dramatically increases the concentration of wealth and income at the top. It is reflected in this decade's increase in U-6 from 7% to 16.7%. Another dacade of moderate growth, and similar productivity "improvement" in the face of a 10% increase in the labor pool will push the U-6 number over 25%.
partha 02:43 01 Sep 10
The problem with the thin line between the structural and the cyclical change can be best described by the transition of the cells of benign cells to the malignant cells. Now if you keep your benign tumor or growth untreated for long time with its long time corrosion or abrasion of the adjacent region (or cells) there is every chance it will be converted to malignant which is irreversible and fast growing metastasizing. So what today appears to be cyclical or non structural change in the job market i.e. mostly by slump of aggregate demand rather than the shifting the sectors of demand may well converted to the full mismatch of skill supply and job demand sector if just let it be kept untreated for long time(by developing new skills, moving to manufacturing and asset building etc). And the thin line between these two hardly keeps luminescent for a long time which gets blurred fast is not capped in time. What west is today just keeping still callous to the measures to cap the structural change (recreates the new matrix of skill development and job requirement) rather still gets consumed by the failed experimentation of market.