Is Unemployment a Problem That Money Can Solve?


Following news coverage can be easy. Understanding some of the terms it uses, less so. In our Flashcard series, The Atlantic explains ideas you may read about but never see spelled out. In this installment, we dig into the nature of our unemployment crisis.

The News

Thanks to the violent explosion of the housing market and the financial industry, nearly 17 percent of the labor force -- roughly the population of New York and Virginia combined -- are either unemployed or forced to work part-time. In the past year, a war has broken out in Congress over how much more money can help.

Underlying this debate is a deeper question about the nature of the unemployment crisis. Is it "cyclical," a problem of low demand, which more money could solve? Or is the problem "structural," a mismatch of workers' skills and employers' needs -- a problem that more money won't automatically solve?

The Gist

Imagine the economy is a bagel bakery struggling through a slow week. One manager says: Once everybody gets their paychecks on Friday, we'll see the lines return. The other manager says: No, everybody's sick of bagels. Even when they get paid, they'll skip the bakery.

The first manager represents the case for cyclical unemployment. It's about demand, which will "cycle" back. The second manager represents the case for structural unemployment. It's not just about demand coming back, it's about demand moving to other goods.

Shifting from Metaphorland to the real world, the cyclical folk scan the unemployment scene and conclude that what's missing is money. With more money, consumers' spending appetites would return, and our pre-recession economy would come back, if slowly.

The structural employment crew says it's not just about giving Americans money to consume the same old goods and services, because Americans aren't hungry for the same old goods and services. The debt bubble permanently reduced our appetite for housing, which means we should expect jobs to move away from the real estate sphere, which includes industries like construction and furniture manufacturing.

The Debate

This debate about adjectives is a debate about action. Government spending can lift demand in the short-term. But even if the Federal Reserve lowers interest rates and Congress spends more money, neither can turn construction workers into doctors.

Who's right? The graph below from Annie Lowrey tracks job growth in major sectors since 2005. Long story short: Most sectors have moderate jobs losses, manufacturing and construction fell off a cliff, and education and health are still growing.

job loss cyclical structural.png

It's impossible to argue that our unemployment crisis has nothing to do with structure. The housing boom demolished certain metro areas in Florida and California, and merely grazed parts of the Great Plains. It blew down the home building industry, but barely made a headwind against health. With the median unemployment duration now over six months, the recession is branding the out-of-work with a scarlet A for Atrophy, which makes it especially difficult for these workers to jump back into the work force. In short, it is changing the structure of the economy.

Is that an excuse to do nothing? No. It's a reason to be humble about the ability of new stimulus to quickly turn the economy around. But it's arguably a reason to do more. It's a reason to expand work training programs; directly hire construction workers into the Army Corps of Engineers; and raise demand in the short-term to keep more workers out of the doldrums of long-term unemployment. More money won't bring the crisis to a swift end, but it can soak up construction workers, lower the unemployment rate and prepare our workforce for the next economy.