Monday, October 25, 2010

On Structural Unemployment and Market Failure

My cousin asked me what the talking heads mean when they say the recession is "structural" and how the market failed.  (I note the Wiki on structural unemployment, could probably use some help if any of you feel like it).

Structural unemployment means that there are jobs out there somewhere, but the people looking for work don't have the skills/locations/something else to take them. There are frictions and transaction costs involved. If it were as costless to move as many economists blithely assume, there would be less unemployment for instance, but is that a case of markets breaking down or of people having an emotional attachment to their homes with high psychic costs for leaving?

The reason commentators just say "Oh, it's all structural" is that we can be a little fatalistic: very little that government policy can do. Except that's not quite right. Policy can be used effectively to reduce transaction costs, like the financial part of moving to find work or strengthening the meager job training programs.

My problem with the structural explanation right now is that they need to show me the jobs that are going begging. There are some. I've blogged about them. But not enough for 1/20th of the labor force. And how does structural unemployment (5-7% of the population) explain a more than 20% drop in average planned consumer holiday spending since 2007?

The reason I think there is something to the structural argument is that it's not just some random 5% of the work force that lost and now can't find work (5% unemployment is "normal" and we're 5% above that. I say "normal" because if we got down to 5% unemployment, almost everyone would stop talking about us being in a recession). Far more African-Americans are unemployed than whites, more high-school educated or dropouts than college educated, more men than women. There's some reason to suspect there's a structural issue there.

But if most of the unemployment problem really is about the less-educated then there is a role for monetary policy.  See here. There's a demand side and a supply side. Growth in businesses, housing starts, etc. increases demand for low-skilled workers, and to the extent monetary policy can increase demand for labor, unemployment goes down. Improving adult education or retraining changes the supply side and enables individuals to find work. The other possibility is to (at least temporarily) roll back the minimum wage increases Congress passed recently or even (!) the employer contributions for Obamacare which together bring the cost to the firm of hiring even a low-skilled worker to over $13 an hour.

So, by the by, if you believe we have a structural unemployment situation and that the Real Problem is minimum wage increases and Obamacare, then it's government failure, not market failure. If you believe that the Real Problem is tight monetary policy for the last two years, then it's government failure, not market failure. If you believe that the Real Problem is lack of education and it's our government supplying the education, that's a government failure too. If you believe that the Real Problem is racial integration, that's ... not a government failure or a market failure, but a humanity failure.

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