Paul Krugman's column today stiff-arms those who say the economy suffers from structural unemployment -- that is, a mismatch between the skills of the unemployed and the needs of employers. Instead, he says, we're suffering from something much simpler: a temporary shortfall in demand, known as cyclical unemployment.
Yes, this is a debate about adjectives. And yes, this particular adjective is very important. If the unemployment crisis is merely cyclical, then government can play match maker in the labor force by spending more money. If skills don't match needs in the labor force, then government efforts to hook up employers and employees might result in a lot of failed marriages and wasted money.
In a structural unemployment crisis, you might expect unemployment to rise more in one industry than others. Since we've come out of a housing/financial bubble, you'd expect finance and construction to be that industry.
But Krugman points to a Roosevelt Institute paper by former Atlantic Business contributor Mike Konczal that shows the opposite. In the graphs to the right, Mike looks at unemployment in finance and construction versus non-finance and construction sectors. They look pretty similar, huh? Mike and Krugman both conclude that the there is nothing structural about our unemployment crisis.
I have great respect for both Mike and the professor, but I think these graphs obfuscate something important. Finance jobs have held up closer to their pre-crash levels because the government essentially guaranteed the safety of the financial industry in late 2008. When you peel away finance and look at the unemployment crisis in construction alone, it looks more grave.
Let's consider two more graphs. The first picture, prepared by Annie Lowrey, shows employment losses by industry since December 2007. Finance is down about five percent, no worse than retail or transportation, both typically cyclical industries (in bad economies, we buy and fly less). But check out the construction nose-dive: it's the worst sector in the economy....
... and it's only gonna get worse. This second graph comes from my colleague Dan Indiviglio in a great piece, Do Construction Jobs Have Further to Fall? The answer is yes. In comparison to past recessions, construction hasn't suffered much worse than usual in 2010. But this was a housing bubble recession. It should have suffered much worse, but didn't thanks to government efforts to prop up the housing market. Still, major cities have months if not years of housing inventory that's waiting to be sold. Until that inventory clears, construction for new homes will sit on ice.
Krugman says our unemployment problem is a demand problem, full stop. But our demand problem is structural, too. The boom of the aughts rode a wave of unsustainable housing demand, and home sales and home prices won't recover to their 2005 highs for many, many years. There is no reason to expect our construction sector, especially in residential construction, to recover to its pre-recession levels with the rest of the economy, and we might not even want it to. This is not merely a issue of cycles. It is an issue of structure. More money might recover millions of jobs, but it won't recover the pre-crash bubble that created and ultimately destroyed millions more.