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Against claims that the North Atlantic today suffers from “structural unemployment”

Brad DeLong, professor of economics | August 29, 2010

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.

Comments to “Against claims that the North Atlantic today suffers from “structural unemployment”

  1. Thank you, Mr. Delong, for the clear exposition of structural unemployment. It is difficult to develop meaningful solutions to the current economic issues with the distraction of numerous, deafening cries of “Wolf!”.

    It is critical to identify the current state of our economy and the fundamental causes of the recession. Only then can we hope to address or correct the most serious issues first.

    The alarmists, charlatans, and grandstanders who muddy the waters with misleading buzzwords do us all a disservice.

  2. Jo,It would seem like the FDR administration that Keynesian economics did not work for, That the Obama administration is in the throws of the same keyneian experiment. Defaecate spending did not work in 1937 and it won’t work now,reindustrialization must be implemented immediately,Gat and Nafta renegotiated.The military industrial budget cut in half,then we may have some money to use for the rebuilding of America.

  3. @Jo —

    Can you stay on topic, please? Mr. De Long was presenting reasons why the suggestion that we are in a situation of structural unemployment is not a likely hypothesis. Implied in that is the idea that traditional Keynesian ideas of how to stimulate aggregate demand should not be summarily thrown out (as those who claim structural unemployment are requesting).

    What is the “Cal economic Department?” Is this some ingroup nickname that shows how hip you are? Anywah, unless they are all from Goldman Sachs, no they are not in charge. And it was not “incoming Democrats” who persuaded President Bush to go for the massive bailout of the Too Big To Fail firms, it was the Goldman Sachs alumni on HIS economic team. It was started in October 2008, before Obama was elected. So your point that we have the same economics team is valid, but not that they were somehow serving Democrats — they serve Wall Street.

    • Look, what I said about the Democrats taking control and of the bail outs were demanded by them is concrete. If Bush had a history of bailouts it would have shown up as a pattern over 8 years. I did not. You have your opinion, but it is not the whole truth. He was weak and bowed to Democratic Pressure in those bail outs. Goldman Sacks is Obama’s cabinet, and other appointments. He is a Democrat if you forgot.

      Economics is simple. What goes out of our country ( export) is our economic gain. What Obama does, however, is redistribute wealth from within ( non-exports) which bi-fabricates the economy. This is empirical as the middle class dwindles. Although this empirically has shown to be a slow process over decades as manufacturing fell by large percentages, the country can only makes excuse after excuse for so long claiming it will not do jobs that other countries will do.

      When Obama bailed out Ford, some of that stimulus cash went to Chinese workers in Chinese Ford Factories. People wonder why there is little to show for that massive spending plan, which was unprecedented and had revealed little to the average American. There is no evidence that socialistic economic programs ever worked in history. In fact, the measly 3.0% growth under Mao Tse-tung was brought on by horrific secret capitalism, where he allowed his farmers to die to sell crops to Euriope and the Middle East — instead of feeding them. Economic expansion under Stalin was spurred on by a 10% of the total Societ economy had buinsess ties with some American capitalist corporations — so the Soviets were never pure socialists and after Stalin they went imperialitic, in Africa, southern Asia and then in the 1970s into Afghanistan. Once the US armed the Muhajadeen and the Soviets lost, they stopped all imperialism and their Soviet Dream collapsed which was given credit to Reagan. They ran about 90% socialism and they failed ( 10% was capitalism as noted).

      Why does not the Cal Economic Department speak about this? Because it shames them and they are wed to the state — the state ( being in America are both state and federal as ‘public’) demands they cater to the going ideology. Under Obama’s preface of his ideology, he is a ‘community organizer’ ( a term meaning public/state controlled/non-private). That was the same title Mao and Stalin had decreed to their people of who they were. Their economies were terrible because they did not allow the people a voice in their own economic inventivness and the same thing is applied to our socialist president. Obama is not running 100% socialism, but he is damned near squashing private enterprenuralship. No one want to work hard to have their work be distributed to people they do not even know or care about. If anyone wants to prove me wrong as show how socialism had worked ( Chinese ran socialism at times during dynasties for centuries and their historians always claimed it either led to invasions from the north or peasant revolts form the south), then put up the facts ( take any point in all of history if you can; I’m,100% you cannot). The only teachable moment on economic policies by Obama himself was to Joe the plummer. he said he would take Joes money ( who was unemployed at the time) and distribute it to others. That is not an economy, that is socialism — they are two different things. If tax was a solution, then pushing that falacy argument — would intend that taxing everyone 100% on everything they made would be utopia. However, that is a fallacy argument, because it implies doing away with currency . BTW, keyneian only works with a large percentage of a manufacturing base. We no longer have that privledge.

      Get ready for an economic meltdown.

  4. Is not the Cal economic Department running the US economy by advising the Obama economic team? I think so, so why is it a fail? How many more millenia will you blame bush, when all he did was listen to the 2006 incoming democrats on bail-outs? Obama spent in the first month in office more money than 7 years of the Iraqi war — in total. Wow, now that was impressive. Was that a Cal recommendation? Me thinks so. So why is the economy a fail?

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