October 2, 2012
Two facts of the historical record, they argued, represent prima facie evidence that unemployment is a cyclical problem.
First, unemployment rose from 4.4% in the spring of 2007 to 10.0% two and a half years later, in October of 2009. “Most structural problems do not occur so rapidly,” they wrote.
But the US went from full employment in August 1929 to 25% unemployment three years later with the onset of the Great Depression, and that unemployment was structural by any of their definitions. This fact is not mentioned in their research.
Instead, as their second supposedly decisive fact, they cite the early 1980s, when unemployment peaked at 10.8% – higher than its peak during the last recession. Many claimed – falsely, in retrospect – that the US was suffering from structural unemployment at that time, according to Lazear and Spletzer. Their point is that we should not heed what has turned out to be a false alarm in the past.
A primarily cyclical problem?
Lazear and Spletzer concluded that “the current recession does not appear fundamentally different from prior ones, except that it is worse.” They attributed the low job growth to slow economic growth.
“The problem is not that the labor market is underperforming; it is that the recovery has been very slow,” they wrote.
Lazear and Spletzer examined a range of labor market data. Looking at changes in employment by age, gender, education and the industrial composition of the economy (that is, the percentage of workers in various economic sectors), they found no evidence of structural problems. Instead, they said, “the economy is continuing to move toward demographic groups and industries with lower unemployment rates, not higher ones.”
Using statistical measures that compare numbers of job vacancies with the unemployed population, Lazear and Spletzer concluded that in no region of the country is there any mismatch of skills to workers available sufficient to label the problem as structural. “The unemployment rate is higher now, not because skills available are less in line with skills desired than they were in the past, but because unemployment rates are higher generally across all industries and occupations,” they wrote.
Lazear and Spletzer dismissed one bit of evidence that is often cited by the structural unemployment camp: the fact that the ratio of long-term unemployed to total unemployed is higher than in prior recessions, even the most severe. This reflects the depth of the recession, they said, rather than any structural problem.
Lazear and Spletzer did not advocate any policy measures, but their conclusion – that our current unemployment is primarily cyclical – bolsters Keynesian economists who support the Fed’s aggressive monetary policies. Their findings also support economists, including Paul Krugman, who have argued that the primary impediment our economy faces right now is a lack of demand, which could be remedied by, for example, rehiring the approximately 600,000 state and federal workers who have lost their jobs since the recession began.
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