The Unemployment Crisis Is Looking More Structural Every Day

[Karl Smith]

The political debate in America has become almost overwhelmed by the merits or faults of Obamacare and the long run challenges of Americas entitlement system.

As big of an issue as these are in the political realm, another, at least as large, issue looms in the economic policy realm. That is, whether our currently elevated unemployment rate is the result of cyclical or structural forces. To say unemployment is cyclical is to say that it is a part of the cycle of booms and busts that economists have been studying for hundreds of years.

To say that unemployment is structural is to say that there is something deeper afoot. The economy is changing in fundamental ways and the workers of yesterday may simply be unable to compete in the world of today. They don't have the right skills, the right training, perhaps even the right temperament for a globalized workforce.

The first problem, cyclical unemployment, has a standard list of treatments designed to increase the total volume of goods and services purchased in the economy. The government could buy more things itself. It could cut taxes and allow citizens to buy more, or the Federal Reserve could drive down interest rates, making it cheaper to purchase things. The last has been the remedy of choice for decades.

When this recession began I was a die-hard cyclicalist. For one thing the recession looked like a cyclical disaster in the making. Collapsing housing prices would make households poorer and more credit constrained. They would have to cut back on the purchases. The banking system was teetering on collapse and should it fall money and credit would have been very hard to come by. All the cyclical alarms were flashing bright red. Frightening parallels to the Great Depression and the Japanese Depression could be drawn. Both featured asset price bubbles and collapsing financial institutions.

Yet as the recession has gone on I have become increasingly open to the possibility that more structural like issues are taking place and they cannot be ignored. For starters the United States has been losing manufacturing jobs a fairly rapid clip since the late 90s. That clip only accelerated in the downturn. The manufacturing transition cannot by itself make a recession. It was going on even doing the mid-2000s.

However, it does provide a headwind against which the entire rest of the economy must push. Growth in other sectors must be rapid enough to undue the long lasting dislocations created by closing manufacturing plants. Cities must restructure and entire regions of the country are struggling to reinvent themselves. Michigan could be said to have been in a nearly permanent recession since the Dot-Com bust. In the national statistics that could be "counterbalanced" by the booms in Nevada and Florida but the adjustment costs to Michigan were still real and didn't go away.

Then there is construction. I wrote yesterday about how unprecedented the collapse in home building has been. Home building is the classic cyclical industry, leading both booms and busts. However, when it has stayed suppressed for so long it's hard not to describe that as a structural-esque change in the economy.

Lastly state and local governments have been shedding workers. In the early days of the recession it was easy to classify this as a typical cyclical move. Tax revenues go down in a recession and state and local governments have to balance their budgets. As a result they shed workers during bad times. A closer look, however, suggests that many governors and state legislators are taking the recession as an opportunity to make workforce changes that had long been interested in. That makes this more of a structural than phenomenon as well. State and local government won't keep shedding workers, forever, but we don't have any particular reason to think those jobs will come back once times improve.

In my mind our current downturn still mirrors mostly closely a cyclical fall; one that could be cushioned by deficit spending, tax cuts or easier money from the Federal Reserve. Yet, the structural headwinds appear more salient every day. Unfortunately, for them there is no easy prescription. Perhaps, no short term remedy at all.