Arnold Kling  

Structural or Cyclical Unemployment?

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Comment of the Week, 2003-09-0... The Civility Plea...

I continue to think that the term jobless recovery should be replaced by productivity-cushioned recession. Meanwhile, Erica L. Groshen and Simon Potter have written more about the phenomenon.


we look for evidence that structural change played a dominant role in the 2001 recession. Our investigation centers on two questions: Did temporary layoffs decline relative to permanent job losses in the recession? Were many of these lost jobs relocated to different industries?

They find evidence suggesting that the answer to both questions is "yes."

Back in the 1950's and 1960's, a recession might have consisted of a decline in demand for housing and autos. Job losers in the automobile sector would be on temporary layoff, and job losers in both sectors would return to work in the industries where they had lost their jobs.

Today's labor market is much more dynamic, with people undergoing transitions from one industry to another. The problem is that jobs are not being created fast enough in expanding industries to absorb people that are laid off from contracting industries.

For Discussion. Is structural unemployment less amenable to macroeconomic policy?


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CATEGORIES: Macroeconomics



COMMENTS (15 to date)
Eric Krieg writes:

This is thought provoking stuff.

Yes, in the 1950s, when someone was "laid off", they were just temporarily asked to stop coming to work. They had every expectation that they would be called back when the economy imporved.

Not so today. Layoffs are permanent.

I'm surprised that no one posits industrial policy as an answer. If new industries aren't creating enough jobs for those laid off in the old ones, why not have government subsidize and pick the new industries?

Not that this will work, just that I'm surprised that no one is suggesting it as a solution.

randy writes:

Check out Bob Hall's recent paper about unemployment: the new BLS data appear to say that recessions are times when HIRING declines (NOT when the job loss rate increases).

Policy should be oriented towards encouraging the acquisition of general skills (so one can switch jobs more easily), and encouraging the development of a 'buffer stock' of saving one can draw down should a layoff occur. Industrial policy is a bad idea: the market should pick winners better than bureaucrats with, shall we say, flawed incentives and little experience.

Eric Krieg writes:

>>Industrial policy is a bad idea: the market should pick winners better than bureaucrats with, shall we say, flawed incentives and little experience.

Frank Young writes:

Randy writes "Policy should be oriented towards encouraging the acquisition of general skills (so one can switch jobs more easily)"

Right on.

The strength of American business to more nimbly react to global competition comes at a price to the workers who need to be able to react just as nimbly. The old days of the "baseball team" employee where everyone knew their position needs to be replaced with the "gymnastic team" employee who can perform multiple positions when their current positions are eliminated.

The answer lies in fiscal policy.

How about removing the income limitations on education-related tax deductions and making permanent the education related tax benefits in the 2001 tax package that are set to expire in 2005?

How about letting companies turn large severance payments into an asset by providing them with an additional tax credit if the payment is made directly to an accredited institution of higher learning?

Eric Krieg writes:

As someone who is doing a master's degree the hard way (part time while working full time), I use the tax code to my maxiumum advantage.

There has been many changes with regard to continuing education in the tax code, some good, some bad.

Companies can no longer deduct employee education expenses that are not directly linked to the employee's job. As a result, it has become much more difficult at my company to get education expenses paid for.

On the flip side, the continuing education TAX CREDIT (as opposed to deduction) is totally cool. It is EXACTLY the right tax policy towards training, the only problem is that you have to have taxable income in order to take advantage of it. Even when I have to pay for a class myself, I can get the money back through a tax refund.

But that's also the problem with using tax policy to shape any agenda. People with lower incomes don't pay income taxes, and won't get any benefit from the tax policy.

Barry Ritholtz writes:

Its about time the Fed (NY Fed, any Fed) noticed that 20 months after the recession ended, unemployment continues unabated.

We've been discussing this for nearly 4 months now.

This has been a unique recession/recovery cycle: Despite a steady (albeit anemic) growth in output, there is lacking a corresponding rise in employment.

It has long been my view that high productivity, overseas outsourcing, and post bubble excess capacity are the key factors conspiring against growth of U.S. employment. Add to that an ongoing secular decline in manufacturing, and you have the makings of a very unusual lack of job creation during a period of historical stimulus, and modest economic growth.

Frank Young writes:

The Fed is doing its part, plenty of capital in the system somehow its not getting put into the hands of the employment growth creators - the small business.

Banks are just clearing up the commercial credit mess from the last growth spurt.

Many banks will be looking to find the next growth frontier now that the mortgage cycle has peaked. Keep the easy supply of fuel (capital) plentiful now we need the pumps (banks) turned on.

Mcwop writes:

My hypothesis is that this past tech boom created some anomalies. There was an unusually high amount of hiring associated with R&D to take advantage of new technologies. For example, a vendor I worked with hired about 200 developers to build a few different pieces of software. Once built, almost all of those people were laid off. This happened because: a) the software was built and only needed a skeletal development staff to enhance and maintain it; b) some software was not commercially successful and discontinued.

The second part is that a lot of capital funded high risk tech ventures that had no certainty of long term success. These companies either went out of business entirely, or reduced staffs dramatically (by 85+%), or were sold for parts thus staffs eliminated.

The last part is that the massive tech upgrade cycle ended, which has hasd the downstream effect of staff reductions.

I find it hard to belive that unemployment rates will drop sharply during a recovery, which I believe that we are in.

John Thacker writes:

Back to the original question, "Is structural unemployment less amenable to macroeconomic policy?"

Hmm. I'd have to say so, but only if you make clear you're talking about effective solutions. There are lots of bad macroeconomic policies that people suggest for structural unemployment-- subsidies, tariffs, governmental industral direction, among others-- but most only make the problem worse in the long run by encouraging inefficient use of resources.

You can probably make at least a decent case for macroeconomic policies encouraging individuals to get retraining and reeducation. It has inefficiencies, to be sure, but presumably would be more efficient during times of structural unemployment.

Randall Parker writes:

There are many ways that tax law could be changed to accommodate the need for employees to change jobs more often. First of all, medical insurance needs to become totally portable. COBRA just doesn't cut it because it times out. It is too easy to have a medical condition and be permanently uninsurable in our current tax system. People need to be able to save pre-tax income when they are working to pay for medical insurance when they are unemployed.

Also, workers need to be able to save pre-tax money for re-training. Labor can not invest in itself with the same tax advantages that capital has for investments.

Employers not only have no loyalty to their workers. They increasingly have no loyalty to their nominal headquarters country. The US labor force is increasingly on its own. The law needs to be changed to reflect that fact.

Randall Parker writes:

Frank Young says: "How about letting companies turn large severance payments into an asset by providing them with an additional tax credit if the payment is made directly to an accredited institution of higher learning?"

One big problem with that: most of what gets taught at accredited traditional institutions of higher learning is fairly well divorced from what the labor market is looking for in terms of skills. The universities have too many tax and spending policies working in their favor. Higher education is sorely in need of a reorientation that causes it to be more responsive to market needs.

Jane writes:

Could you tell me how does structural unemployment differ from cyclical unemployment in australia?

Hi, Jane.

You asked:

>Could you tell me how does structural unemployment differ from cyclical unemployment in australia?

In general, structural unemployment refers to unemployment caused by permanent changes in a country's situation. Cyclical unemployment refers to short-term effects caused by temporary conditions (such as business cycles) that can be expected to disappear within a few years. You can read more on this in Larry Summers' article, "Unemployment," at
http://www.econlib.org/library/Enc/Unemployment.html

It should be possible via econometric techniques to get rough estimates of the relative contributions of each kind of unemployment for a given country by regressing a time series of unemployment on various time series of underlying variables. However, I do not know offhand what the current divisions are for Australia.

Lauren

justice muyitsi writes:

I THINK THE GOVERNMENT SHOULD INCLUDE A CERTAIN AMOUNT IN ITS BUDGET FOR INVESTING SO AS TO CREATE INDUSTRIES THAT WILL ABSORB PEOPLE WHO ARE STRUCTURALLY UNEMPLOYED.BUT FIRST TRAINING SUCH PEOPLE IN RELATION TO THE SKILLS REQUIRED BY THE ORGANISATION.

Julie Davis writes:

Is structural or cyclical unemployment the most serious source of unemployment today?

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