Structural Unemployment: Posner

The term “structural employment” means high unemployment that persists through the business cycle, rather than being high only during economic downturns, and so is likely to reflect features of the structure of the economy. Structural economy was a characteristic of the post-World War I British economy. Keynes explained it as the consequence of an overvalued pound, which by making British exports very expensive reduced exports and hence employment in production for export, and by making imports cheap reduced the consumption of domestic products and hence the producers’ demand for workers. Demand for labor was so weak that the going wage for many workers was lower than their unemployment benefits. There were also impediments to relocating from geographical areas of high to low unemployment within England; Becker points out that the depression in our housing market complicates relocation to low-unemployment areas in this country.

Unemployment in the United States rose rapidly beginning in the fall of 2008, and it remains abnormally high three years later. Since the economy is still in the doldrums, it is hard to tell whether the abnormal unemployment rate is structural—in which event it may be the “new normal”—or whether it is cyclical. Another complicating factor, emphasized by Becker, is the extension of unemployment benefits to almost two years. Unemployed persons often wait until their benefits are about to expire before they undertake a serious search for a new job, though my guess is that the longer the benefits period, the less the delay in job search; the worker worries about the erosion of his job skills and becomes financially pressed because unemployment benefits are lower than wages. 

Although it is premature to say that we have a problem of structural unemployment, it may also be premature to say that we do not. The financial crash and ensuing global economic crisis was a business-cycle phenomenon, but a crisis of such magnitude can bring about or be correlated with or highlight a structural change in the economy. The most inclusive measure of the U.S. unemployment rate—what is called U-6 and includes discouraged and involuntarily underemployed workers as well as unemployed ones looking for jobs (unemployment in the narrow sense)—has risen from a shade above 7 percent in 2000 to a shade above 16 percent at present. True, it fell sharply between 2004 and 2007, but those were years in which the economy was artificially pumped up by massive cheap borrowing interacting with deep tax cuts. Without the tax cuts and the cheap borrowing, and without a recession (more realistically, a depression), there might have been steadily increasing rather than irregularly  increasing unemployment over the last eleven years. 

The economic crisis is related to, and may have accelerated, trends that could create structural unemployment. One trend is increased competitiveness of foreign producers, resulting in Americans’ substitution of cheap imports for domestic products (and hence domestic production and therefore domestic employment), and in a reduction in exports. This is the same combination that caused or at least contributed to the structural unemployment in the U.K. that I mentioned. The severe ongoing economic crisis in Europe has also reduced demand for U.S. exports. And it is difficult for the U.S. to devalue its way to increased exports and reduced imports because of the role of the U.S. dollar as the principal international reserve currency. 

A related trend, also adverse to U.S. employment, is the decline in educational performance of American students relative to students in other countries. Furthermore, quite apart from the minimum wage and lengthy and generous unemployment benefits, American workers are expensive to employers because of workers’ legal rights and the extensive regulation of workplace safety. The costliness of these rights and regulations leads American companies to relocate as much of their production abroad as they can and accelerates the substitution of capital for labor inputs into production—and much of that capital equipment is produced with few workers. 

Persistent unemployment can feed on itself, because the unemployed have lower incomes and so spend less on consumption (and consumption drives production and therefore employment), and because the long-term unemployed lose skills. And if the pattern of employment shifts, many workers discover that they have not been trained for the types of work in which there are jobs. 

If all public benefits for the poor were abolished, along with unions, unemployment benefits, the minimum wage, and regulations of workplace conditions, the going wage would plummet and unemployment would fall. But as such draconian measures are not in the cards, we have to worry about the possibility of structural employment and think of civilized ways of heading it off.

Comments

[Jack]

Structural unemployment has been my strong suspicion for a long time. How long? At least since the stock market boom that camou'd a slack job market with dollars from the boom, be it an otherwise unemployed guy sitting at home trading stocks, or enough HH income that a spouse need not seek employment.

Then the false housing boom that employed all those who worked on 2 million or more new home starts per year when the sustainable rate is but one third that number (700,000)

While the guys were out there building them others were profiting from sales of the trade-in home, loan origination, title insurers, and of course the WS financial sector that grew from a small function in our economy to one having gleaned a third of all the profits in the nation. LOT's of jobs for $15/hr "robo-signers" too.

All gone with a huge overhang of properties not well tailored to the market which today is primarily "entry level" for kids getting their first home, and to a lesser extent, high end for those not feeling the deep recession. Mid-range move up is dead.

The outlook? the best possible, AFTER mopping up some 5 million homes in various stages of inventory is for new home starts to approach the replacement and population increase level of 600-700,000 starts. The timing is in years, not months.

Despite being a major leg of the economic stool "housing" isn't the whole picture but with those guys on unemployment or having lost most of the juicy bank fees or their jobs entirely, retail, auto, durables and every other sector is going to continue to feel the chilly winds. As Posner mentions an unemployment check is barely a life raft and not an invitation to "go shopping".

Gone too are is the income that masked stagnant wages and unemployment for the last couple of decades. Market returns during the stock market boom, home appreciation as median home prices soared above long term trend lines and ratios of owner costs to rental income:

http://www.jparsons.net/housingbubble/

Still there is much work to be done. Everything related to the aging of the boomer generation from increased medical care to assisted living and on a lighter note retirement homes and services.

Staring us in the face is over $2 trillion of long delayed infrastructure maintenance and upgrades.

And, though every nation would like to hitch its wagon to increased exports, it would seem that we're well positioned to expand our exports a bit........ and with more domestic labor decrease our imports of costly oil. There's billions and billions to be saved and invested here with lots of domestic jobs, many of which could be done by the heavily impacted construction sector and youthful trainees.

But you can quickly spot the "structural" problems: Instead of dealing with increased medical and other care for the elderly we're pretending we're going to cut costs in that sector. Ha! good luck taking food out of the mouths of the boomer gen! Hasn't happened since they came of age.

Leading us out of being so heavily dependent on oil? the price of which we've little control over? and ginning up jobs from switching much of our transportation to NGas, building a LOT more wind generation and solar? Well you watch the news and see the obstructionistas at work in all of those areas.

Retraining? Gingrich comes out with a plea for retraining to begin day one of unemployment filing. Ha! yah sure, from the temporarily unemployed carpenter to the more dire circumstance of mid-life folk having been bounced permanently from construction, mid management, to retail and other niches we're going to re-groove them as?? what? medical interns for an again population? Tour guides at some far flung retirement area? Ha! "Show me".

I've much less intuition as to "higher education" as cure-all for either joblessness or our level of competition in the "new world order". In any case it's not something that can be fixed in short order, and in the short run we've a tremendous unemployment rate among recent graduates.

Min wage? As an issue? That a job needing to be done won't generate $60 worth of value? Or that someone is going to try to live on $1200/month? when a recent study in moderate cost OK indicated that $18 was required to live a very modest but independent level of existence? Are Posner and Becker aware of the many "apprentice jobs" that attract those wanting to come to our shores but pay nothing and apparently do little to prep them for advancement? Just another slavery situation.

As for:
If all public benefits for the poor were abolished, along with unions, unemployment benefits, the minimum wage, and regulations of workplace conditions, the going wage would plummet and unemployment would fall."

......... so a simple "supply demand" analysis would indicate. But how and to what end? Would we regain the poverty wages jobs of sewing Levi's and other clothing together? How would those of sub-min wage fit in with an economy based upon much higher wages? ie where would a $5 guy live? eat? get medical care?

Lastly why does this "comprehensive" essay not even mention the costs of over compensated CEO's in a discussion of global competition where those heading up companies abroad are not paid 400 times what they pay working folk? IF...... belt tightening is the prescription should it not begin with examples from "leadership?"

[Thomas Rekdal]

I find this disussion very confusing. Becker argues very plausibly that it is hard to believe that 4% of the labor force that was employable in 2007 has now become unemployable, even if the economy were to pick up. At the same time many companies--Siemens, for example--claim that they have thousands of jobs they cannot fill because most applicants do not have the skills that would even make them trainable, let alone employable. How can both be true? I don't get it.

[Jack]

Thomas: Well a guess is that of several million being idled by the housing collapse and be they sheetrockers or mortgage aggregators it's unlikely they can fill the particular jobs offered by Siemens. One form of structural. With the other being that "thousands" of jobs are not millions and the question being "IS 85% of our workforce plus Asia/India and others satisfying all that the beleagured American consumer can demand?"

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[Jimbino]

Typo:

"Structural economy was a characteristic of the post-World War I British economy"

should read

"Structural unemployment was a characteristic of the post-World War I British economy."

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[Terry Bennett]

I'm not sure it's classically structural, i.e., steeming from lack of skills. I think it may be structural in the sense that it stems from lack of demand. We don't need 100% of the available workforce to produce enough to meet the necessities for 100% of the population. If everyone stops consuming non-necessities and stocking up for future needs, we are left to confront the stark reality of the culmination of centuries of progressively more efficient production and distribution. We simply don't need that many workers to cover the present basics, and that's all people are buying right now.

When confidence is high and we are not strictly correlating production and consumption - either individually or collectively - there is enough of a fudge factor in that fluidity to take up the slack. In the aftermath of what has been a reckoning for many, with people reigning in their lifestyles, paying down debt and increasing savings, etc., we have inched closer to a necessities economy, and the need for new entries into the pyramid scheme to keep it going is more obvious. (This is why many are touting exports. Immigration could also bring new people who need to consume, if they could bring with them some wealth with which to do that consuming. Immigrants could also bring with them an emotional need to catch up, so they may tend to consume more aggressively than the current population, increasing demand in some small measure.)

From my point of view, the current circumstance is more grounded in reality. A lot of speculation has now been removed from the market, and I think this provides a clearer picture of the fundamentals from which to gauge our choices, again both individually and collectively. We were living in a fantasy before. And we will again. People will forget this funk, because at the end of the day, people want stuff. Americans in late 2011 are caged animals, still a little scared from having been recently stung but growing more frustrated by the day at having nothing better to look forward to than going to work and safely meeting their bills. We will turn this corner, our cabin fever will get the better of us, and we will once again take risks and think optimistically (not that we'll be correct in that assessment). It may be months off, it may be years off, but it is inevitable that we'll start living again, there will once again be enough float to absorb the unskilled somewhere, we will see bubbles again, and we'll enjoy it until we find ourselves busted again. It's what we do.

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[Jack]

Terry, you've summed uyp

"We don't need 100% of the available workforce to produce enough to meet the necessities for 100% of the population. If everyone stops consuming non-necessities and stocking up for future needs, we are left to confront the stark reality of the culmination of centuries of progressively more efficient production and distribution. We simply don't need that many workers to cover the present basics, and that's all people are buying right now."

Yep....... lack of D E M A N D leading to even lower demand. And gridlock and inflated egos all around.

[Back Taxes]

Terry Bennett hit the nail on the head. There is more then enough people employeed today to keep up with demand.

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[Jack]

Ha! while topics such as structural unemployment lasting years ought to be front burner in Congress, we're instead treated to a days long pony show of fantasy fare "Balanced Budget Amendment" which would make even worse the problem of being ruled by an even smaller minority.

Then there is the laughable idea of a Congress "wielding" a 14% approval rating having the leadership to push through even a worthy Amendment to our Constitution.

A wasteful exercise for attempting to fool the gullible with "recorded votes" in contested election districts not already, favorably gerrymandered.

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[TANSTAAFL]

Posner correctly raises the increased competitiveness of foreign producers, and the decline in educational performance of American students relative to students in other countries, as factors that tend to increase structural unemployment. Global demographics instruct that manufacturing job growth in nations with emerging economies will continue to outpace manufacturing job growth in America. As compared to the post-World War II era, Americans with high school diplomas today are much less likely to find manufacturing jobs, because there are 2-3 billion people in emerging economies with similar skills who are willing to work more cheaply in order to have a shot at attaining a middle class standard of living. This comparative advantage on the part of foreign manufacturing workers will persist for many years. Absent tectonic changes in the American educational system, the numbers support no other conclusion.

[Back Taxes]

Although i agree, i disagree that education reform will ever be put into place. It has been the topic for more then a small while and has yet to take shape.

[Jack]

Tans, Perhaps, though with but 11% of our workforce in mfg, as with farming before, it's much less likely that ANYone will find employment in that sector.

It seems, counter to the political discourse that our primary job snathcher has been the doubling of per capita productivity over the last 25 years or so. You'll be comforted by most of the income from the productivity gains having accrued to the topmost income tiers which has, in your terms? the beneficial effect of pounding down US wages of all sectors --- though as a matter of making ourselves more competitive we'd have to get rid of a LOT of our overpaid deadwood in the top 2% and find something more productive for our WS thieves and scammers to do.

So far, though many would like to depict us as bumbling laggards I notice that the trade deficit has not increased very much, and were we to implement an energy policy worthy of the title we'd be within reach of narrowing our trade deficit as the bill for imported oil is on par with the entire trade deficit.

The advantages at $100 imported oil of using our own domestically produced N-Gas, various alternatives and conserving more of what we now waste should be obvious -- soon perhaps even to cetain political obstructionists apparently favoring power and campaign donations over patriotism.

Wages level as comparative advantage? When I studied econ it seemed that comparative advantage revolved around one nation being able to cheaply produce grains that might be traded with another for their seafoods or to another for their advantage in industrial products. I don't recall slave wages being a part of the equation.

In fact there was an interesting discussion about Japan's then phenomenal growth rate and wave of exports and whether we Americans ought to give up some leisure time and work harder in an attempt to match their growth rate. The conclusion seemed to be "probably not" as the Japanese were in their rebuilding and rapid growth era as we were when our economy was much smaller and our advantages great.

All things equal, as they never are, it should be much easier for Japan, at the time, or Mexico today to double its exports than for the US to do the same...... our productive juggernaut being demand limited abroad as it is domestically.

Education? If we had the will and were convinced, down to the political level that increasing the numbers with college degrees or technical certs etc were to save our nation from being just another mediocre country that would seem a good place to mop up some of the unemployment. Today we're still graduating less than 30% from college and have as many dropping out of even completing HS. Were we to decide in favor of a national goal of 50%?? college graduation, it seems obvious that making it financially an easier choice would be the first move, along with seeing to it that HS drop out rates were lowered by means we know, but do not employ universally.

Back Taxes! For one so positive in regard to simply starting a biz or easily gaining new employment you sound a bit negative today. Were wages not so constrained for most of our working folk perhaps there would be a niche in tutoring and counseling those who need a bit of help. Have you thought of other ease of entry businesses for our many unemployeds yet?

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We have nothing like that in place or even in mind. Instead those desperate for any kind of job are to work longer hours for less pay and be appreciative for their opportunity.

[Bob]

While Posner is certainly a legal expert, I'm not sure what 'worker legal rights' and 'worker safety regulations' he's referring to that makes US workers less competitive than, say, Germany or Canada where unemployment is lower. Those countries, as far as I know, have FAR more protection than US workers (in fact US workers have comparatively few rights). AND they have stronger unions, but have larger manufacturing bases than the US does. Judge Posner needs to be more clear on this aspect of his contention.

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Having higher numbers of occupants per existing structure doesn't bode well for selling off the homes having fallen or about to fall into the laps of bankers.All of the sci-fi stories pointed to a shorter work week, more leisure time and industries developing around increased leisure time coupled with the income to enjoy it. We have nothing like that in place or even in mind. Instead those desperate for any kind of job are to work longer hours for less pay and be appreciative for their opportunity.

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All of the sci-fi stories pointed to a shorter work week, more leisure time and industries developing around increased leisure time coupled with the income to enjoy it.

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We have nothing like that in place or even in mind. Instead those desperate for any kind of job are to work longer hours for less pay and be appreciative for their opportunity.