Opinion, Berkeley Blogs

Against claims that the North Atlantic today suffers from "structural unemployment"

By Brad DeLong

We hear from surprisingly many quarters these days that North Atlantic governments and central banks should give up on expansionary policies to try to reduce unemployment, for the high unemployment that currently afflicts the North Atlantic is not cyclical but "structural," and hence not open to alleviation by policies that boost aggregate demand.

Let me be the first to say that structural unemployment is a true and severe danger. Situations in which people who in other circumstances could be happy, healthy, and productive members of the work force but lack the skills, the confidence, the social networks, and the experience needed for them to find a place to do something worth paying for--that is a tremendous danger. And if unemployment in the North Atlantic stays elevated for two or three more years it is highly likely that that danger will be upon us: nothing converts cyclical unemployment into structural unemployment more certainly than prolonged unemployment.

But now? Does it look right now as if the North Atlantic is afflicted by structural unemployment? No, 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 by "structural" features that have produced a mismatch between the skills of the labor force and the distribution of demand. You have a situation in which the structure of demand by consumers is different from the jobs that workers are capable of filling. For example, suppose (to take a case at random) 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 a situation of structural unemployment to the extent that the ex-construction workers could not find things to do in manufacturing that would make it worthwhile for manufacturing firms to hire them.

What would we then expect to see?

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 we posited that 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 bid 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 take quite a while to retrain a construction worker and plug him or her into a social network in which he or she was a good manufacturing higher. 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.

Is that what we have today?

In the North Atlantic, no. In the past three years employment in construction has fallen, employment in manufacturing has shrunk, employment in wholesale trade has fallen, employment in retail trade has fallen. employment in transportation and warehousing is down, employment in information distribution and communications--except internet--is down, employment in professional and business services is down by 1.3 million, employment in educational services including public employment is down, employment in leisure and hospitality is down, and employment in the public sector is down.

Employment is up in health care, in internet-related businesses, and perhaps in logging and mining.

In the United States, the past three years have seen a decline from 137.83 million people employed in July 2007 to 129.95 million people employed in July 2010--a 7.88 million decline in employment during a period in which the adult population has grown by 6 million.

What we have had is not a shift in demand into sectors that the workforce is unproductive and unqualified to work in, but rather a collapse in the level of demand.

It may well look like structural unemployment in three years. In three years we may well see rising wages in prices in expanding sectors, and labor shortages in growing industries accompanied by high unemployment elsewhere in the economy.

But that is not our problem now. Sufficient unto the day is the evil thereof.