Monday, 5 August 2013

The Structural Unemployment Delusion

The lingering reverberations of the Great Recession continue to send an unpleasant sting throughout the global economy. Although in the United States we’re witnessing steady—albeit sluggish—growth, effective policy targeted at job creation is still very much needed to reduce ongoing unemployment, which currently stands at 7.4%.

Both the Federal Reserve and policy makers in Washington are meant to implement measures aimed at boosting employment. The efficacy of the policies that they offer depends upon a proper understanding of the nature of unemployment. Currently, a number of underlying causes have been attributed to the ongoing inertia of US jobs growth.  On the one hand, sustained deregulation, a debt-driven housing bubble and fly by night activity on wall street—among a host of other factors—led to the most severe economic downturn since the Great Depression. Unemployment that results from these sources is termed cyclical unemployment.

On the other hand, the transition from a labor-based economy to an increasingly more global and knowledge-based economy is beginning to require the workforce to possess fundamentally different skills. Some assert that these shifts have obfuscated the natural rate of unemployment; they argue that the ongoing high rate of unemployment has little to do with the lingering effects of the recession, but rather is the result of a skill shortage for available jobs. This type of unemployment, stemming from a mismatch between the supply and demand of skills, is termed structural unemployment.

US Unemployment Rate

Each type of unemployment requires a different prescription to overcome. The classic remedy for cyclical unemployment is expansionary monetary and fiscal policy aimed at stimulating the business cycle and boosting aggregate demand. Once demand is restored, the thinking goes, firms will ramp up production and again begin to hire. Structural unemployment, however, is much different in nature and requires a fundamentally different prescription. Because this type of unemployment is the result of a mismatch between the supply and demand of skills, monetary and fiscal policy will do very little, if anything at all, to alleviate it. Instead, the existing incongruity must be reconciled with education and job retraining in order to provide the workforce with the required skills to secure employment.

So, then, what is anchoring employment? Are structural or cyclical factors mainly to blame? The answer is a little bit of both, but, right now, the evidence tells us that it’s mainly cyclical.


According to the Economic Policy Institute, job vacancies are currently 16% below their prerecession levels. In 2007, there were 1.5 unemployed job seekers for every job vacancy in the US. This ratio jumped to 6.7:1 in 2009, and has since declined to 3.1:1 in April, 2013. As job seekers outnumber job vacancies in every sector, the data strongly suggest that cyclical factors are to blame for weighing on unemployment.

Research from the Brookings Institute has further substantiated this claim. “Even if we could magically endow all job seekers with precisely the skills needed to find work in expanding industries,” writes Gary Burtless, “we would not have reduced the unemployment rate in the Great Recession very much, and for a very simple reason: There were comparatively few job vacancies to fill.”

Available Jobs to Job Seekers

Does this mean that structural employment isn’t an important concern? No. Structural sources do have a role to play in unemployment, and they will likely become more relevant going forward. But attributing unemployment to structural sources alone, and discarding the efficacy of further monetary and fiscal policy in favor of job retraining—or nothing at all—is both shortsighted and ineffective.

Yes, we should encourage children and young adults to pursue a STEM (science, technology, engineering and math) curriculum, as STEM related fields are expected to be among the fastest growing jobs. But for the 3.6 million unemployed Americans between the ages of 45 and 65, the investment in retraining for a STEM career is unlikely to bear fruit. Return on investment for education is likely only to pay off after a long time horizon—perhaps spanning decades. The closer individuals are retirement, the more unwilling they will be to incur the cost of retraining.

Most notably, the sectors that are expected to have supply shortages in the coming years—including STEM related fields, such as computer science—do not currently have supply shortages. What does this mean? Well, even if an unemployed adult invested in an education in computer science, he or she would still face an environment with fewer jobs than applicants. Moreover, firms are much more likely to tender offers to recent graduates looking to build careers over older applicants nearing retirement.

These findings tell us something very important; namely, expansionary monetary and fiscal policy can still play an important role in alleviating unemployment. Rather than a mismatch between the supply and demand of skill, it is depressed aggregate demand that remains the main source of lingering unemployment. Congress and the Fed must act accordingly if our economy is to recover.

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