Friday, September 24, 2010

The Great Waste: Cyclical, Structural, or Both?

Structural unemployment occurs when the skills and culture of the workforce are a bad match for the demands of the market. For Marketarians there can only be two kinds of unemployment - structural and voluntary [1]. This follows because the Market is all wise, and the Market saith "Thou Shalt not Waste Inputs".

Since we obviously have substantial involuntary unemployment and underemployment, a Marketarian must believe this Great Waste is structural. If it is structural, there is nothing to do [2].

Despite some childhood flirtations I an not a Marketarian. Still, I'm sympathetic to the notion of structural unemployment. I've been expecting it for over 10 years. Between globalization, the rise of the machine and the whitewater world I find it easy to imagine that we are facing a structural employment problem. Krugman seemed to agree 3 years ago. Robert Reich is a structuralist today.

Unsurprisingly, The Economist, the modern bible of Marketarians [3], thinks US unemployment is structural too. They point to IT changes...
... In the 1970s and 1980s employment in quintessentially middle-skilled, middle-income occupations—salespeople, bank clerks, secretaries, machine operators and factory supervisors—grew faster than that in lower-skilled jobs. But around the early 1990s, something changed. Labour markets across the rich countries shifted from a world where people’s job and wage prospects were directly related to their skill levels. Instead, with only a few exceptions, employment in middle-class jobs began to decline as a share of the total while the share of both low- and high-skilled jobs rose (see chart)...
The development of information technology (IT) is the leading candidate. Computers do not directly compete with the abstract, analytical tasks that many high-skilled workers do, but aid their productivity by speeding up the more routine bits of their jobs. But they do directly affect the need for people like assembly-line workers or those doing certain clerical tasks..
... the economists find that industries that adopted IT at faster rates (as measured by their IT spending, as well as their spending on research and development) also saw the fastest growth in demand for the most educated workers, and the sharpest declines in demand for people with intermediate levels of education...
In recent writings, however, DeLong and Krugman tell us today's unemployment is not primarily structural (see also). The patterns of widespread unemployment (no labor mismatch) and concomitant deflation don't fit the structural story.

I am largely persuaded by their arguments, but I wonder if we might have both. Perhaps  demand driven unemployment might mask a structural problem?

That occurred to me yesterday. Fortunately Krugman monitors my thoughts so he's already responded ...
... Is it possible that there has been some rise in structural unemployment that’s swamped by a much larger rise in cyclical unemployment? Yes, conceivably...
Aha! Trust me on this -- I run Krugman in an internal simulation. I know what he's thinking. Krugman secretly believes that we do have a serious structural unemployment problem, but atop that we also have a cyclical unemployment problem. (FWIW, My DeLong simulation holds the same secret suspicion.)

Rationally, we should tackle both the cyclical and structural causes of the Great Waste.

Alas, we're not so good at rational these days.

[1] They would further claim that significant structural unemployment is primarily a result of government distorting the (perfect) market.
[2] I can imagine quite a few ways to approach structural unemployment, but that's a cardinal sin for a Marketarian -- akin to planning the overthrow of heaven.
[3] It wasn't always so bad. In the late 80s to early 90s The Economist was a great newspaper.

See also (mostly mine):
Update 9/29/10: My Krugman simulation is robust. Just as I suspected.
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