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Jobs for the long run

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Jobs for the long run

UNEMPLOYMENT is high, and the longer people are unemployed the longer they are likely to stay that way. Eventually, they may become discouraged and drop out of the labour force. So what can be done? The economic infighting about whether unemployment is structural (and there’s a new natural rate) or cyclical (just unemployment brought on by weak demand from the recession) is important; each requires different policy.

It’s impossible to know precisely how much unemployment is structural and how much is cyclical, and probably there’s some of both right now. Cyclical unemployment resulting from weak demand is amenable to expansionary government spending or monetary policy. Structural unemployment is harder to fix. Structural joblessness results from things like skills mismatches, and policy to address such mismatches is inherently longer-term in scope, involving education and encouraging innovation. Expansionary policy can’t reduce structural unemployment; when that’s all that’s left, more expansion generates nothing but rising inflation.

Structural unemployment isn’t necessarily permanent. The natural rate of unemployment tends to vary in the medium run. It can be very hard to disentangle how much unemployment is cyclical and how much is structural because each tends to increase during recessions. A recent paper by Nir Jaimovich and Henry Siu found that skill-based job loss is not a gradual process. Rather, 92% of job loss in routine-manual jobs (typically blue-collar or low-skill work) since the 1980s happened during recessions. They argue this explains jobless recoveries in such areas. Consider the figure below, which plots changes in per-capita employment in routine-manual jobs since the 1970s (the pink bars are recessions):

In contrast, employment in high skills areas rose over this period. Looking at the figure above it’s hard to believe that many of these low-skill jobs are going to come back. When times are tough uncompetitive firms are under more pressure to cut costs, and such firms will struggle to scale payrolls up again in recovery. They may also use the period to invest in technology which displaces low-skill workers.

This dynamic is not unique to the last few decades. Tyler Cowen recently suggested that structural factors may help explain why unemployment was so persistent during the Depression. Even that story has an encouraging lesson. BStructural unemployment did eventually fall as the economy underwent a structural change during World War II and thereafter, thanks to a large investment in human capital from programmes like the GI bill. Few would argue this justifies an end to monetary expansion. A significant component of unemployment is probably cyclical and its elimination is dependent on further monetary support. But that won’t be sufficient to restore unemployment to pre-recession levels. For that to happen complementary policies focused on the long run will also be necessary.

Source: The Economist

Tags assigned to this article:
cyclical unemploymentStructural unemployment

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