The Agenda

On Structural vs. Cyclical Unemployment

I think the two sides of this debate are talking past each other. Brad DeLong has a very narrow view of “mismatch”:

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 but 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.

Let’s say we raise employment levels through more aggressive monetary policy or fiscal stimulus. What happens when we make our exit if mismatch persists? DeLong spends the bulk of his column establishing that we don’t have a mismatch problem because employment levels are depressed across all sectors:

 

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.

To quibble with DeLong’s example, it helps to keep in mind a worker who hasn’t completed high school — like 13.4 percent of U.S. adults over 25 — who has been working in construction in Florida or Arizona and who is now trying to find one of the many manufacturing jobs that demands the equivalent of a college degree. Let’s throw in the possibility that the worker has limited English proficiency, a fact that wasn’t a barrier to low-wage construction work but that will prove a more formidable barrier on a high-tech shop floor.    

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.

Let’s assume that demand for manufactured goods is high, but that the cost of employing new workers has increased, thanks to a panoply of regulations and the rising cost of non-cash benefits, and that labor-saving machinery and offshoring allow firms to economize on hiring and training new U.S. employees while getting more out of the existing workforce. 

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.

And what if aggregate demand is a problem as well as skills mismatch? It’s not obvious to me that the problems have to be mutually exclusive. One can believe that aggregate demand is a problem but that we have limited room for further fiscal stimulus for a variety of reasons. 

As James Ledbetter observes in an excellent Slate column on “strucs” vs. “cycs”:

Stepping back from America’s politicized debate, it is clear that at least some kind of mismatch is present. Torben Andersen, who teaches economics in Denmark, notes that among the 32 countries of the OECD, “the sectors adversely affected by the crisis (building sector, financial sector, export sector) are not necessarily those which would benefit from a more expansionary policy increasing public and/or private demand.”

That suggests at least one limit to how effective government stimulus can be right now, and reflects back on our original proposition. For example, the Obama administration’s mortgage tax-credit seems to have had some temporary effect on the purchase of homes. But stimulating demand will not alone revive the construction industry and restore the estimated 1.8 million jobs that it’s lost in the last two years, certainly not anytime soon. Indeed, some pessimists believe that the construction sector will continue to shed millions more jobs, even as the economy continues its tepid recovery.

Shimer’s theory goes deeper. In his September 2007 paper “Mismatch,” he claims to be able to explain a large number of variables associated with unemployment and labor markets. His model purports to take into account, for example, why some unemployed people are more likely than others to find a job, and that some jobs and some workers are more likely to disappear than others. Thus, he claims the model can account for what appear to others as mysteries, such as why employers might not be raising wages to fill jobs that they complain they can’t fill. 

DeLong doesn’t find Ledbetter’s take convincing. Felix Salmon had an insightful response:

DeLong reckons that there can’t be much of a mismatch, because there’s precious little evidence of excess demand for labor in any industry. But this ignores, I think, globalization: companies which can’t fill jobs domestically simply outsource them, or set up shop abroad. Rather than looking just at U.S. employment figures, it would be helpful to look also at the total number of people employed by U.S. companies, and see whether that’s showing a different trend. [Emphasis added.]

Moreover, Felix continues,

just because it’s hard to find good employees doesn’t mean that your business is booming and that there are lots of incentives for the unemployed to join your industry. The Cycs could well have a point here — if we get an uptick in total demand, then that might help increase employment in the parts of the economy with tight labor markets. But for the time being, employers who can’t find the employees they want seem to be resigned to simply keeping on going with the employees they’ve got: dreams of expansion have given way to grim survival and a refusal to take on extra debt or risk. And they certainly don’t want to risk raising their prices in this economy, even if they suspect they could get away with doing so.

Felix’s analysis makes a lot of sense to me. 

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