rssThe Cyclical, Structural Unemployment Problem
Tuesday, August 31, 2010 at 5:24 pm
- 128 Comments
Economists often describe unemployment as “cyclical” or “structural.” Cyclical unemployment results from broad economic slowdowns: As the economy turns, businesses lay off workers, meaning other businesses suffer, meaning more layoffs. Structural unemployment results from broad economic changes: An economy with a strong apple trade might be becoming an economy with a strong orange trade, and as that transformation happens, a lot of apple workers might be out of a job.
Economic commentators such as Mohamed El-Erian, the head of PIMCO, have described the United States’ problem as mostly structural. The housing boom created millions of jobs in construction, development and realty, and those jobs are gone. Over at Project Syndicate, economist Brad DeLong makes the argument for cyclical unemployment:
In [the case of structural unemployment] we would expect to see construction depressed: firms closed, capital goods idle, and workers unemployed. But we would also expect to see manufacturing plants running at double shifts – the money not spent on construction has to go somewhere, and, remember, the problem is not a lack of aggregate demand. We would expect to see manufacturers holding job fairs, and when not enough workers showed up, we would expect to see manufacturers offering higher wages to attract workers into their plants, and then raising prices to cover their higher costs. [...]
That is what “mismatch” structural unemployment looks like – and it is not what we have today, at least not in Europe and North America. In the past three years, employment in construction has shrunk, but so has employment in manufacturing, wholesale trade, retail trade, transportation and warehousing, information distribution and communications, professional and business services, educational services, leisure and hospitality, and in the public sector. Employment is up in health care, Internet-related businesses, and perhaps in logging and mining.
DeLong does not say that structural unemployment does not exist in the U.S. economy, just that the problem is primarily cyclical. In a few years, with unemployment still projected to be above 8 percent, the problem will primarily be a structural one, he notes.
Though the problem seems to me to be both: The unemployment is cyclical and structural. Most sectors have suffered from the turndown, but job losses are concentrated in some industries: In residential construction, they are down 38 percent since 2006. (Between Aug. 2007 and Dec. 2009, unemployment in construction quintupled from about 5 percent to about 25 percent.) In health care and education, however, jobs are up.
Here is a chart I made from Bureau of Labor Statistics data that shows the phenomenon. (The chart shows total jobs in major sectors since 2005.) Most sectors — retail trade, business services, wholesale trade, finance — have had moderate job losses one could reasonably chalk up to an economy-wide lack of demand. Let’s think of those as sectors characterized mostly by cyclical job loss. Then, there is manufacturing and construction. Jobs there have taken a nose dive, and the problem seems to be structural. Moreover, the job gains in education and health might thought to be structural as well. (Mining and logging isn’t an industry I know a lot about, so I’m not sure what’s going on there.)
That said, the big problem at the root of all of the employment woes remains sluggish demand.
One can also think about the unemployment geographically. Joblessness has tracked up in all states, due to lack of demand. But states with big manufacturing and construction industries — Michigan, Nevada, California and Florida — are suffering from massive structural unemployment, made worse by the foreclosure crisis. (Four years ago, you might have been working in construction in Nevada and overpaid for your house. Today, you’re likely out of a job and, worse, can’t move to a state like North Dakota because you can’t sell the property.)
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128 Comments
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Comment posted September 1, 2010 @ 12:35 am
The true problem is that we only look at Health And Senior care as the only options for growth. It is a bubble like every other hiring venue in the last 35 years. Reality check, The ones this industry take care will be dead in 10 years. Sorry for the remark, but it is true. Health care for Seniors is the next bubble, simply because the service industry will accept illegals with phony Id, to work this market, putting our Mother's and Father's in danger of substandard care, and we hope for the best because this is all we can afford. How pathetic we have become! We have a younger generation that needs support. As a nation we have to look towards sustaining the population, not a specific market. Get rich quick, it works for those that can afford a loss. We have to start creating a population that can support itself. Both international and domestic businesses can do this, but we have to limit the big conglomerates. No country is owned by another internally or internationally because we can't pay our debt. We must sustain our own citizens. As a really poor person, I would like to see manufacturing come back to the USA, fair trade agreements and the idea that I can go to my neighborhood bank or credit union and say my small business having a hard time will you help. We no longer have that, I owe so much money because of credit card fees,I paid off the balance and paid fees but because I was late on some payments I am now in debt not for the original amount owed, but for thousands of dollars because I refused to pay the additional fees, collection agencies call me non-stop . I am not the brightest bulb on the Christmas Tree, but I know that I could support myself if the opportunities were there. As a pity party I am high up on the list, but if you discuss the options for a 59 year old female worker it is pretty accurate.
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[...] Sep Brad DeLong and Annie Lowrey have both weighed in on the different kinds of unemployment, with one of DeLong’s points [...]
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Comment posted September 2, 2010 @ 5:42 am
Economists fail to realize the extent to which advancing technology and globalization are contributing to unemployment. While we all wait for the economy and job market to recover, businesses are going to continue to automate and offshore jobs as they continue to cut costs. Recent corporate profits are all coming from cost cutting…not new revenue. We are entering a death spiral.
For a great overview of this, see the free PDF of this book:
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Also see the author's blog at http://econfuture.wordpress.com.
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Pingback posted September 2, 2010 @ 7:03 am
[...] Lowrey creates a great graph showing job losses by sector (click to enlarge). This is what Ezra Klein sees: [...]
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Comment posted September 2, 2010 @ 10:08 am
Ms. Lowry,
If you want to use an industry's decline to make a point, it is better to start from the last trough, or examine a couple of business cycles. Picking a bubble industry (construction) and starting midway in the last bubble won't provide good information for analysis.
A look at BLS from Jan. 1995- July 2010 shows that the most recent trough was in March 2003 with seasonally adjusted employment of 6,654,000 . Compared to this figure, the July 2010's 5,573,000 is a 16.2% decrease. Though brutal is it really evidence of a structural shift? More like the worst hangover you've ever had.
Likewise, the increase in health and education continues a long term upward trend – only more so because of the large number of people getting additional education and training because the job market stinks.
Bob
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Comment posted September 2, 2010 @ 1:47 pm
I'm a little surprised that not a single sentence of this article – which I think is asking a lot of the right questions – was devoted to the topmost line on the jobs-by-sector graph: “Logging and Mining”. I believe a big chunk of that line is energy, and I would guess that logging is actually a rather small chunk. Since all the lines start at one, it looks like this represents the ratio of jobs in year X to in year 1 (2005) – is this correct?
The Mining/Energy line tells a dramatically different story than the rest of the graph. It says that as housing employment was rising towards its peak in 2007, Energy/Mining employment was rising even faster, and peaked later. The employment part of the housing bubble actually peaked well before the market crash in mid-to-late 2008, but job growth in the energy and health sectors masked that until 2008/2008. Like housing, energy is pretty dependent on financing, so it's no surprise that it took a big blow after the credit bubble burst. Since the lines are normalized to 2005, it's hard to evaluate the overall contribution to total job losses, but nonetheless, the Mining/Energy line merits more thought, because it would seem that sector might have more jobs yet to shed…
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Comment posted September 3, 2010 @ 5:21 am
An economy with a strong apple trade might be becoming an economy with a strong orange trade, and as that transformation happens, a lot of apple workers might be out of a job.
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[...] “Economists often describe unemployment as “cyclical” or “structural.” Cyclical unemployment results from broad economic slowdowns: As the economy turns, businesses lay off workers, meaning other businesses suffer, meaning more layoffs. Structural unemployment results from broad economic changes: An economy with a strong apple trade might be becoming an economy with a strong orange trade, and as that transformation happens, a lot of apple workers might be out of a job.” – Washington Independent [...]
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What is the relationship between the cyclical unemployment rate and the natural rate of unemployment?…
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