Sunday, November 28, 2010

Structural Versus Cyclical Unemployment

What is the difference? Basically, certain people take structural unemployment as a reason to do absolutely nothing about the problem of unemployment. In contrast, if unemployment is cyclical, then it is possible to use fiscal and monetary policy to counteract it.

The "do nothing caucus" has been declaring that unemployment is structural for quite a while now, in an attempt to justify doing absolutely nothing to solve our current dire employment situation. As Paul Krugman and others have noted, evidence is not on the side of the "do nothing caucus" given that the classic signs of structural unemployment are not present: "there are no large groups of workers with rising wages, there are no large parts of the labor force at full employment, there are no full-employment states aside from Nebraska and the Dakotas, inflation is falling, not rising." The main motivation for the arguments of the "do nothing caucus" is apparently not evidence, but an ideological belief that government should not intervene to lower the unemployment rate. Basically, the "do nothing caucus" goes from the desired policy result, namely, government inaction to lower unemployment, to the argument that would bolster that policy result, namely, that unemployment is structural rather than cyclical. Forget about the facts.

Ironically, if unemployment is allowed to remain high for an extended period of time, it will change from being cyclical (relatively temporary) to structural (relatively permanent), as job skills erode and workers find it increasingly difficult to readjust to the workforce. So, saying that unemployment is structural is a self-fulfilling prophecy. If you do not do anything to reverse temporary cyclical unemployment, then those workers will become more permanently unemployed as structural unemployment sets in. This is one of the biggest arguments for taking urgent action to fight unemployment. Alas, it is an argument that has been mostly ignored and is likely to continue to be ignored and at our peril.

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