Do We Have a Structural Unemployment Problem?

That was the question that economists Peter Diamond, Dean Baker and Kevin Hassett debated yesterday afternoon in a panel discussion at the American Enterprise Institute (AEI). Moderated by AEI’s Michael Strain, the panel did not disagree on much, particularly its emphasis on the need for government programs to help the long-term unemployed.

Nobel Prize winning economist Peter Diamond, now professor emeritus at MIT, kicked off the debate by arguing against the oft-repeated claim that the current unemployment problem is not just cyclical, but is structural as well. He focused on the Beveridge Curve, which graphs the unemployment rate compared to the job vacancy rate. It’s shown below:Beveridge Curve

When the unemployment rate is high, the vacancy is rate is low as that generally coincides with recessions when employers aren’t hiring. As you can see from the graph above, the concern amongst economists is that there are now more job vacancies for higher levels of unemployment in the past few years compared with the recent decade. However, Diamond was dismissive of this, nothing that over the long-term, the Beveridge Curve fluctuates dramatically and often crosses back above itself after recessions.

“This is not a tight, technical relationship,” he said. “This is a curve that moves all over the place, in part for reasons we could identify, in part not.

“The path back being above it has happened a number of times before and sometimes after that you stay above,” he added. “Sometimes after that when you get back toward full employment, you’re back to the old curve or even below it. So the issue of thinking about how to interpret the path we’re seeing is something that really calls for digging underneath these aggregates.”

Diamond emphasized that a couple other economic points indicate that this is a cyclical unemployment problem. In particular, the lack of wage growth in any major industry is very surprising if the structural unemployment theory is true. If there was a structural unemployment problem, firms would be unable to find workers with the adequate skills and would have to increase wages to fight for the scarce talent. But that hasn’t been the case, Diamond said. Wages have been stagnant.

He also examined the construction industry in particular to see if the change in long-term unemployed construction workers’ employment has been any different than changes for long-term unemployed workers in other industries. When he looked at the data, he found few differences. This rebukes the idea that long-term unemployed construction workers have been unable to reenter the labor force due to a mismatch in skills.

Dean Baker, the Co-Director of the Center for Economic and Policy Research, added an additional layer to Diamond’s argument, noting that the Beveridge Curve has shifted upwards only for the long-term unemployed, not for the short-term unemployed. This is evidence that there was not a structural employment problem for the long-term unemployed when they were part of the short-term unemployed. The issue began when they became part of the long-term unemployed.

The final panelist, AEI’s Kevin Hassett, focused almost entirely on the problems of those workers.

“When you create a stock of folks who have been unemployed for a long time, then it makes it uniquely difficult to reattach them to the labor market,” he said. “There’s been insufficient attention to the emergency of the long-term unemployed.”

Hassett joked that he’d received a surprising amount of praise from liberal organizations recently for his promotion of government jobs programs to help those workers. Yet, even Hassett in conjunction with liberal economists has been unable to convince policymakers to implement such a program. This, he noted, is devastating to those workers, who see significant negative effects on health and wages due to their long-term unemployment. For those reasons, this is a problem that Congress cannot kick down the road.

The longer we wait to confront this pressing issue, the worse it will become. Unfortunately, the lack of interest from Congress may mean it will get much worse.


One thought on “Do We Have a Structural Unemployment Problem?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s