Tuesday, February 8, 2011

Structual Unemployment

It has been argued that the high unemployment rate in the current recession is mostly structural and because of this AD/fiscal stimulus policies will likely have small effects. Moreover, it has also been said that many of the jobs lost will never return.

For instance, in The Economist:

... America’s labour market has developed structural problems that may explain why it is struggling to respond. ... One is that the recession hit certain industries, such as manufacturing and construction, especially hard. Jobs lost there will return slowly if at all, and people turned out of factories and building sites may be poorly suited to openings in growing fields such as health care and education.

It is hard to evaluate what these statements really mean without a definition of structural or what it means that the jobs will never return. For the rest of the post, structural unemployment will be taken to imply that the jobs lost in construction and durable goods manufacturing will not be coming back.

The first thought is the following: Why is losing jobs in construction and manufacturing considered structural whereas the loss of jobs during the dot-com bust was not? One obvious reason is that the information and computer services sector was (and perhaps still is) a growing industry. However, durable goods manufacturing is considered a declining industry. Did the financial crisis merely accelerate its decline? How can one evaluate the statement that most jobs lost will not be coming back?

The chart shows total employment in the construction (blue) and durable goods manufacturing industries (industry). There is an unmistakable upward trend in construction and a similar unmistakable downward trend in durable goods manufacturing. It is also fair to say that some of the jobs lost will not be coming back. But it is also fair to say that following every recession, some of the jobs lost also came back. One definition of structural might be to take the ratio of job losses during a recession to job gains 6 months to a year after a recession in an industry to make an argument of what the shortfall in employment would have been without a recession to defend one's a view that a recession has caused structural unemployment.

However, it appears that navel gazing and polemics seem to be the norm in the blogosphere as far as this issue is concerned.

No comments: