Reasons For Skepticism About Structural Unemployment

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<ul><li><p>8/8/2019 Reasons For Skepticism About Structural Unemployment</p><p> 1/12</p><p>Economic Policy institutE 1333 H strEEt, nW suitE 300, East toWEr WasHington, Dc 20005 202.775.8810 WWW.EPi.org</p><p>E P I B R I E F I N G PA P E RE c o N o m I c P o l I c y I N s t I t u t E s E P t E m B E R 2 2 , 2 0 1 0 B R I E F I N G P A P E R # 2 7 9</p><p>Unemployment has remained at 9.5%1 or above or more than a year, and may remain that high or inch even</p><p>higher through the end o 2011. Te predominant, and in our view correct, narrative to describe this situation</p><p>has been that the bursting o the housing bubble and the resulting loss o wealth led to sharp cutbacks in</p><p>consumer spending. Te loss o consumers, along with nancial market chaos brought on by the bubbles burst, also led</p><p>to a collapse in business investment. As consumer spending and business investment dried up, severe job loss ollowed.</p><p>Further, even ater economic output stopped contracting (in roughly the middle o 2009), its subsequent growth has not</p><p>been nearly rapid enough to create the jobs needed to even keep pace with normal population growth, let alone to put</p><p>the backlog o workers who lost their jobs during the collapse back to work.</p><p>Our view that this is the correct explanation or the jobs crisis is rooted in datathe observed collapse o overall</p><p>output, reductions in consumption, and extensive excess capacity. Te policy conclusion drawn rom this narrative is</p><p>that we need aster growth to increase the demand or workers and reduce unemployment.</p><p>Yet, there has been increased attention to a competing narrative, the possibility that a large share o current high</p><p>unemployment is structural, meaning that the problem is that those who are unemployed are not well-suited to the</p><p>jobs becoming available.2 Tis would be, or instance, because their skills are inadequate, have deteriorated, or are not</p><p>applicable to the industries that are expanding, or that</p><p>the unemployed simply do not live in the places where the</p><p>jobs are. Some make claims about structural unemploymentbecause certain aggregate relationships, such as between</p><p> job openings and unemployment, do not appear to be</p><p>ollowing historical patterns, suggesting a possible skill</p><p>mismatch. Others have postulated that employers have</p><p>substantially revamped their production processes in this</p><p>downturn, thereby eliminating the need or many o the</p><p>types o workers who are currently unemployed. Still others</p><p>T a b l e o C o n T e n T s</p><p>skpticim pprprit ....................................................................3</p><p>lkig r vidc .........................................................................5</p><p>Ccui ............................................................................................10</p><p>www.ep.</p><p>Reasons foR skepticismabout stRuctuRal</p><p>unemploymentexmiig th Dmd-sid evidc</p><p>B y l a W r E n c E m i s H E l , H E i D i s H i E r H o l z , a n D K a t H r y n E D W a r D s</p></li><li><p>8/8/2019 Reasons For Skepticism About Structural Unemployment</p><p> 2/12</p><p>E P i B r i E f i n g P a P E r # 2 7 9 s E P t E m B E r 2 2 , 2 0 1 0 PagE 2</p><p>note that the housing bubble lead to a bloated construc-</p><p>tion sector and many o those jobs will never come back,</p><p>leaving many workers needing to switch to new jobs or</p><p>which they may not be qualied.</p><p>O course, it matters whether the claim is that structural</p><p>unemployment is a large or small share o unemploy-ment at this stage o the business cycle. Unless our current</p><p>unemployment problem is primarily structural, policies</p><p>to alleviate cyclical unemployment are still appropriate.</p><p>Tus, this paper addresses and questions the claim that</p><p>structural unemployment is the predominant reason that</p><p>unemployment is high. Tere has been little evidence</p><p>oered to support the claim o extensive structural un-</p><p>employment, and we nd that the pattern o employer</p><p>behavior regarding job openings, layos, and hires does</p><p>not support such a claim. his matters quite a bit or</p><p>guiding policy. Te policy implications o a nding that</p><p>our high unemployment is primarily structural are that:</p><p>(1) it would be oolhardy to use urther demand manage-</p><p>ment (scal stimulus, either tax cuts or increased spending,</p><p>or monetary policy) to lower unemployment; and, (2) the</p><p>appropriate policy is to oer education and training to</p><p>the unemployed to help them make a transition to new</p><p>occupations and sectors.</p><p>Lest we be accused o critiquing a straw man, note the</p><p>recent statement o the Minneapolis Federal Reserve Bank</p><p>president, Narayana Kocherlakota:</p><p>What does this change in the relationship between</p><p>job openings and unemployment connote? In a</p><p>word, mismatch. Firms have jobs, but cant nd</p><p>appropriate workers. Te workers want to work,</p><p>but cant nd appropriate jobs. Tere are many</p><p>possible sources o mismatchgeography, skills,</p><p>demographyand they are probably all at work.</p><p>Whatever the source, though, it is hard to see</p><p>how the Fed can do much to cure this problem.Monetary stimulus has provided conditions</p><p>so that manuacturing plants want to hire new</p><p>workers. But the Fed does not have a means to</p><p>transorm construction workers into manuac-</p><p>turing workers.</p><p>O course, the key question is: How much</p><p>o the current unemployment rate is really due</p><p>to mismatch, as opposed to conditions that the</p><p>Fed can readily ameliorate? Te answer seems to</p><p>be a lot.Most o the existing unemployment</p><p>represents mismatch that is not readily amenableto monetary policy. (Kocherlakota 2010)</p><p>Te competing explanation, as mentioned above, is the</p><p>one we nd most plausible: the economy is operating</p><p>ar below its potential output because o a shortall</p><p>in demand caused by an extreme loss o inancial and</p><p>housing wealth that caused a cut back in consump-</p><p>tion. hus, there are simply not enough jobs to go</p><p>around. Evidence or this explanation ocuses on such</p><p>indicators as low operating capacity in manuacturing,</p><p> which was 71.6% in June 2010, down rom 79.1%</p><p>in December 2007.3 Vacancies in commercial oices</p><p>(now at 17.4%) (Canalog 2010) are a urther indica-</p><p>tion o excess capacity. he bottom line is that total</p><p>demand in the second quarter o 2010 is still below its</p><p>pre-recession level.4 In act, total output, as measured</p><p>by gross domestic product, was still 1.3% below its</p><p>pre-recession level.5 O course, one would expect</p><p>demand and output to have grown substantially over</p><p>the two-and-a-hal years since the recession began.</p><p>he Congressional Budget Oice conservatively puts</p><p>the output gapthe dierence between potential</p><p>and actual outputat 6.4% in the second quarter.6</p><p>Te deceleration o ination is another sign o weak</p><p>demand, with core ination (excluding uel and ood)</p><p>decelerating rom 2.3% to 1.8% to 1.0% over the last</p><p>three years.7 Lower ination or deation is a strong in-</p><p>dicator that total demand has declined, leaving rms</p><p> with excess capacity. Similarly, very low interest rates</p><p>accompanying large ederal decits are another sign o</p><p>slack in demand, as this would not be the case i rmsand households were borrowing at their usual scale.</p><p>In our view, the pervasiveness o: (1) lost employment</p><p>and output across sectors; and (2) high unemployment</p><p>across types o workers by state, education, age, and</p><p>occupation suggests an aggregate or macroeconomic</p></li><li><p>8/8/2019 Reasons For Skepticism About Structural Unemployment</p><p> 3/12</p><p>E P i B r i E f i n g P a P E r # 2 7 9 s E P t E m B E r 2 2 , 2 0 1 0 PagE 3</p><p>explanation rather than one rooted in a ew sectors or</p><p>locations or because o the lacking skills o some workers.</p><p>s rrTe claim that current unemployment is primarily struc-</p><p>tural should require much more evidence than seems tobe oered because common sense would deny such an</p><p>explanation. Ater all, a structural unemployment story</p><p>presumes that millions o workers are now inadequately</p><p>prepared or available jobs even though they were ruit-</p><p>ully employed just a ew months or years ago.</p><p>Productivity, technology investment: Did the</p><p>economy transorm itsel rom the end o 2007 to the</p><p>beginning o 2010? What would lead us to believe</p><p>that, and what ootprints would such a transormation</p><p>leave? One would imagine that such a transormation</p><p> would be associated with sizeable productivity gains</p><p>and signicant investments. Productivity did grow a</p><p>pretty spectacular 6.3% rom early 2009 to early 2010.8</p><p>However, thats the ull extent o productivity growth</p><p>since the start o the recession, a total o 6.3% growth</p><p>over a two-and-a-hal year period. In the last quarter,</p><p>the second quarter o 2010 that has received so much</p><p>attention or the ailure o unemployment to all, pro-</p><p>ductivity was actually negative, a decline o 1.8%. Net</p><p>investment in business equipment and sotware in 2009</p><p>(the latest data) was actually negative, the rst time this</p><p>occurred since World War II. In other words, the alleged</p><p>structural transormation o production processes was</p><p>notassociated with new equipment or new technological</p><p>processes (requiring sotware). It is reasonable to doubt</p><p>whether it happened at all.</p><p> Location: Is it just a need or greater mobility, or</p><p>the unemployed to move to where jobs are more plentiul?</p><p>Well, where would they go? Te disparity between states</p><p>unemployment rates is indeed striking, ranging rom</p><p>14.3% in Nevada to 3.6% in North Dakota.9 In act,there are 11 states where the unemployment rate in June</p><p>was less than 7.0%. Still, it is not as simple as a geo-</p><p>graphical mismatch, with high perorming and low per-</p><p>orming states. Tese 11 states with low unemployment</p><p>have a total adult population o about 17 million, or</p><p>about 7.0 % o the U.S. total.10 I the unemployed (14.6</p><p>million in June) moved to those states they would nearly</p><p>double the labor orce there. A similar calculation can be</p><p>made or states whose unemployment has risen by 3.0</p><p>percentage points or less. Te ailure to relocate can-</p><p>not explain high unemployment unless the receiving</p><p>states could readily absorb the unemployed. Tat is</p><p>simply not the case.Construction: A minor oray into labor market data</p><p>suggests that construction does not play the outsized</p><p>role imagined by the president o the Minnesota Federal</p><p>Reserve Bank and many other commentators. Tough</p><p>a construction story is perhaps intuitive given the role</p><p>o the housing bubble, it is noteworthy that those who</p><p>see a large role or construction have not examined the</p><p>associated labor market data. It is true that construc-</p><p>tion has lost many jobs in this downturn, losing nearly 2</p><p>million jobs rom the start o the recession through the</p><p>second quarter o 2010. Tis accounts or about 25%</p><p>o all private-sector jobs lost.11 Is this whats ueling the</p><p>unemployment problem? Te answer is No, not at all.</p><p>As shown in Figure A, in the second quarter o 2010 un-</p><p>employed construction workers comprised 12.4% o the</p><p>unemployed and 12.5% o the long-term unemployed:</p><p>this means that unemployed construction workers are</p><p>not more likely to be long-term unemployed than those</p><p>displaced rom other sectors. Even beore the reces-</p><p>sion, in 2007, unemployed construction workers were</p><p>10.6% o all unemployed and 11.0% o the long-term</p><p>unemployed.12 Te notion that unemployed construc-</p><p>tion workers are ueling unemployment is not true. Just</p><p>because there was an extreme loss o jobs in construction</p><p>does not imply that those workers are driving up unem-</p><p>ployment: many ound jobs in other sectors and some</p><p>have let the country.</p><p>Beveridge Curve: Te Beveridge Curve describes</p><p>the historical relationship between unemployment and</p><p>job openings, and allows one to predict how high or low</p><p>the unemployment rate should be given a certain numbero job openings. Tere has been much attention to the</p><p>mid-July blog post by David Altig (Altig 2010a), senior</p><p>vice president and research director at the Atlanta</p><p>Federal Reserve Bank who used such an analysis to</p><p>suggest that almost a third o the unemployed, 4.6 million</p><p>workers, are structurally unemployed. Less noticed is that</p><p>Altig backed o this claim just a month later.</p></li><li><p>8/8/2019 Reasons For Skepticism About Structural Unemployment</p><p> 4/12</p><p>E P i B r i E f i n g P a P E r # 2 7 9 s E P t E m B E r 2 2 , 2 0 1 0 PagE 4</p><p>f i g u R e a</p><p>shr th tt umpyd d g-trm umpyd wh r ctructi wrkr,</p><p>2007q2 - 2010q2</p><p>NotE: Data are not seasonally adjusted; data shown are not time series but second quarter of each year only.</p><p>souRcE: EPI analysis of Bureau of Labor Statistics data.</p><p>0.0%</p><p>2.0%</p><p>4.0%</p><p>6.0%</p><p>8.0%</p><p>10.0%</p><p>12.0%</p><p>14.0%</p><p>2007q2 2008q2 2009q2 2010q2</p><p>Ctructi hr umpyd</p><p>Ctructi hr g-trm umpyd</p><p>In mid-July Altig wrote in Macroblog, the Atlanta</p><p>Federal Banks blog,</p><p>Since the second quarter o last year, the un-</p><p>employment rate has ar exceeded the level that</p><p>would be predicted by the average correlation</p><p>between unemployment and job vacancies over</p><p>the past decade.</p><p>Te dashed line in the chart above, which isestimated rom the data rom 200008, represents</p><p>the predicted relationship between the number</p><p>o unemployed persons in the United States and</p><p>the number o job openings. Tat simple rela-</p><p>tionship would suggest that, given the average</p><p>number o job openings in April and May, the</p><p>unemployed would be expected to number about</p><p>10.4 millionnot the nearly 15 million we</p><p>actually saw. (Altig 2010a)</p><p>Tis claim was based solely on a simple analysis o job</p><p>openings and unemployment since 2000, encompassing</p><p>the experiences o just two recessions (the Job Openings and</p><p>Labor urnover Survey data used in the analysis only</p><p>became available in late 2000). Altig conscientiously</p><p>backed o (Altig 2010b) in mid-August rom his mid-July claim ater a more in-depth analysis o job openings</p><p>and unemployment was presented by Cleveland Federal</p><p>Reserve economists Murat asci and John Lindner (asci</p><p>and Linder 2010). Using more data to obtain a longer</p><p>time rame (going back to 1951) asci and Lindner ound</p><p>that unemployment being higher than what the Beveridge</p><p>Curve would suggest is not an anomalous relationship</p></li><li><p>8/8/2019 Reasons For Skepticism About Structural Unemployment</p><p> 5/12</p><p>E P i B r i E f i n g P a P E r # 2 7 9 s E P t E m B E r 2 2 , 2 0 1 0 PagE 5</p><p>between job openings and unemployment, but typical o</p><p>deep recessions and what happened in the initial recoveries</p><p>ollowing the deep recessions in the 1970s and 1980s.</p><p>Altig cites asci and Lindners ndings that:</p><p>Hence, cyclical changes may not necessarilypresent themselves asa neat movement along</p><p>the curve. During and ater recessions in the</p><p>postwar period, the Beveridge Curve has gener-</p><p>ally ollowed a pattern o shiting to the right</p><p>during a recovery. One potential reason or this</p><p>could be that even though some unemployed</p><p> workers start lling the available job openings,</p><p>workers who had let the labor orce might get</p><p>encouraged by the recovery and start looking or</p><p>a job, thereby keeping the unemployment high.</p><p>While the Census may have skewed the data or</p><p>this recovery, the path o the curve going orward</p><p>looks poised to ollow in the ootsteps o previous</p><p>recessionary periods. (asci and Linder 2010)</p><p>Altig then backs o o his earlier claim, ending his post by</p><p>approvingly listing asci and Lindners conclusion that,</p><p>Firm conclusions will only be able to be drawn as more</p><p>data are generated (asci and Linder 2010).</p><p>l r vOne o the curious aspects o th...</p></li></ul>

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