‘Structural unemployment’?

Why NOT throw money at the problem?

Dean Baker: Paul Solman takes me and my grumpy friend Paul Krugman to task for insisting that there is a growing consensus within the economics profession that we are not suffering from structural unemployment. Krugman and I used our blogs to complain about Aug. 2’s segment in which Brooks suggested structural unemployment was the economy’s main problem and that there was little that could be done about it.

The United States currently has about 9 million fewer people working than if it had continued on its trend of growth from 2002 to 2007.

The question is whether the unemployment problem is a lack of demand due to a loss of $8 trillion in housing bubble wealth, or whether there are structural problems that would prevent most of these 9 million people from being re-employed even if the demand were there. Krugman and I support the former idea; those who see unemployment as structural are in the latter camp. Here’s another way to think about the problem. Imagine someone found a $1 trillion bill in the street and decided that, as a public service, she would spend the money over the next 12 months to boost the economy. For simplicity, let’s assume that she decides to divide her $1 trillion so that it is spent in exactly the same way that the economy’s current $16 trillion in annual spending is spent.

In my view, this $1 trillion of new spending would cause output to increase by roughly 6 percent. (I’m ignoring multiplier effects to keep things simple.) Employment would also rise by roughly the same amount, filling the bulk of the 9-million-jobs hole. In other words, this would be great news for the country.

However, if Brooks and other proponents of the structural unemployment argument are right, the economy lacks the ability to increase production by enough to fill this additional demand. In that case, by adding $1 trillion in demand to the economy, our philanthropist would create all sorts of bottlenecks and shortages.

This may appear in soaring prices for specific commodities (oil or gas), but it should also show up in shortages of various types of labor. For example, we might see the wages of people with computer or engineering skills soar while the wages of factory workers languish. Let’s be clear what a structural unemployment problem would look like: There wouldn’t be a shortage of labor, but a shortage of workers in the right places or with the right training.

In short, this story — that employers would be hiring workers if workers just had the right skills — is not supported by the evidence. If employers can’t find the workers they need, they raise wages. This is how a market economy works.

Exactly right. So if we do have structural employment, some segments of the worker economy would be booming. So why aren’t they? Baker explains:

The problem with the structural unemployment story is that it is very difficult to identify any substantial segment of the labor market where there are rapidly rising wages. In the last decade, even the wages of college grads have not kept pace with the rate of inflation. If college grads just got their share of productivity growth, their wages would be rising by more than 1.5 percentage points a year above the rate of inflation. In fact, there is no major occupational category, even among workers with a college degree or higher, where wage growth has kept pace with productivity growth over the last decade.

We don’t see rising wages, therefore we can assume that employers are not having trouble finding workers; end of story.

This simple fact, and others that follow from it, has led to a growing consensus in the economics profession that the economy’s problems stem from a lack of demand rather than from structural issues.

Go read the rest. Dean, as usual, has sensible solutions no one in power ever listens to.