Unemployment is still high—9.6% as of last month. But is it structurally high? In other words, is the rise of joblessness due to fundamental changes in the economy? Or is the fallout from the recession the main problem? The answer matters. If structural unemployment dominates, the case for additional stimulus—monetary or fiscal—is weakened. A new round of quantitative easing, for instance, would be of little if any value if the economy is suffering from structural unemployment.
The key challenge in a rise of noncyclical unemployment is the mismatch between the jobs offered in the economy and the available skills of the unemployed. Fixing this problem takes time, assuming it can be fixed at all short of waiting for a new generation of workers to come of age with the appropriate skill sets. By contrast, retraining older workers to find jobs in, say, technology vs. auto manufacturing is problematic at best and the antithesis of a quick fix.
By some accounts (here, for instance), there’s some statistical support for thinking that noncyclical forces have elevated the unemployment rate. And economist Edmund Phelps wrote last month that the economy is afflicted with structural unemployment. "Our economy is damaged by deep structural faults that no stimulus package will address," he opined in a New York Times op-ed.
But lots of people disagree. Dean Baker of the Center for Economic and Policy Research argued earlier this week that "There is No Evidence for the 'Structural Unemployment' Story." Economist Andy Harless recently told readers to "Stop Worrying About Structural Unemployment."
A new study from the Economic Policy Institute also attacks the idea that the surge in unemployment of late is mostly structural. Instead, the problem is cyclical, which means that monetary and/or fiscal stimulus is still relevant. Cyclical problems, in short, require cyclical fixes. As the EPI study explains,
The loss of consumers, along with financial market chaos brought on by the bubble’s burst, also led to a collapse in business investment. As consumer spending and business investment dried up, severe job loss followed. Further, even after economic output stopped contracting (in roughly the middle of 2009), its subsequent growth has not been nearly rapid enough to create the jobs needed to even keep pace with normal population growth, let alone to put the backlog of workers who lost their jobs during the collapse back to work.
Our view that this is the correct explanation for the jobs crisis is rooted in data—the observed collapse of overall output, reductions in consumption, and extensive excess capacity. The policy conclusion drawn from this narrative is that we need faster growth to increase the demand for workers and reduce unemployment.
So, who's right? Or, more importantly, how will we know who's right? The fact that this question is being debated so vigorously at the moment is by itself discouraging news. The jury, in other words, is still out--not an encouraging sign. The final judgment, however, will come in the data. If unemployment remains stubbornly high for an extended period, the case will be strengthened that we're suffering from structural joblessness. Alas, the data drips out slowly, one report at a time. Later today comes the next installment: initial jobless claims for last week. This data series has been going nowhere fast this year. Will today's report change the trend? Stay tuned.