What’s Cyclical Unemployment?

Does Ezra Klein know the difference between cyclic and structural unemployment? Consider this:

To see what he means, consider a Michigan construction worker laid off in early 2008. He didn’t lose his job because he was bad at it but because his firm lost access to credit. He hasn’t been able to find another job, because no one is hiring in his area, and he can’t sell his house, because it’s now worth less than what he owes on his mortgage.

Right now, he’s an example of what economists call “cyclical unemployment.” He’s unemployed because of the business cycle. But if his stretch of joblessness lasts for too long, that might change. His skills might deteriorate, and so too might his confidence. He might join an altogether more troubled group: the “structurally unemployed” — the out-of-work who can’t get jobs because they’re not suited for the jobs that employers are offering. The long-term unemployed, Posen warns, can become “de facto unemployable over time.”

If you answer, “I can’t tell because there’s not enough information” I think that would be a fair response. However, if you say “yes, that’s cyclical unemployment”, I find that pretty puzzling.

Item 1. Michigan, as the result of an ongoing decline in the U. S. automobile industry, has been growing at a rate slower than nearly any other state in the Union for decades now. The automobile industry’s decline is structural. Hence, declines that follow that decline are structural, too.

Item 2. While you can’t attribute any single job to cyclical or structural unemployment, in what world will we ever return to the frantic level of activity in the construction industry we’ve seen over the last decade (let alone the last 30 years)? There’s a year’s worth of housing inventory right now and sales are flat. Commercial real estate is in at least as big a fix. Certainly there’s got to be some contraction in the construction industry, doesn’t there? That’s structural unemployment.

Does he mean something else by the terminology?

3 comments… add one
  • PD Shaw Link

    Sounds like a blogging disorder where he is trying to explain macroeconomic principles at the individual level, but macroeconomic principles are by definition aggregate phenomena.

  • Your point is a good one and, as it turns out, timely. The recent Nobel Prize for Economics was awarded for the study of unemployment.

    But unemployment is not a thing; it is an abstraction. The things that unemployment actually represents are creating new businesses, existing businesses going into new areas, projects ending, businesses shutting their doors, hiring, firing.

    That’s my primary gripe with the economists like Paul Krugman who operate as though looking at the landscape from 50,000 feet. You don’t stimulate employment by increasing aggregate demand or, at least, if you do it’s a poor approximation of what has actually happened.

    What actually happens is that businesses are created or destroyed, projects are started or abandoned, stores are opened or closed. If we want to create real jobs for real people rather than abstract jobs for abstractions of people, we’ve got to start thinking in those terms rather than in terms of unemployment and aggregate demand.

  • Sounds like a blogging disorder where he is trying to explain macroeconomic principles at the individual level, but macroeconomic principles are by definition aggregate phenomena.

    Well, ideally macroeconomic concepts should be grounded in microeconomics. Failure to do that can lead to macroeconomics theories that imply things like money illusion.

    But differentiating between cyclical and structural unemployment is not straight forward. Taking a look at the construction worker, he is also in a market where there is currently far more housing than there is demand. There was a significant over-investment, and it could take years to sort itself out (longer if the government keeps trying to prop up housing prices). So even though he lost his job as the business cycle turned this construction worker might also be part of the structurally unemployed–i.e. we simply wont be employing nearly as many construction workers for a very long time no matter what the business cycle does. It is time for that person to move on and find another line of work.

    And I’m not saying it isn’t tough or going to cause hardship, but the problem with government policy is that it usually is designed try and get us “back to the status quo”. But with the kind of economic crisis we’ve had that is also stupid policy. We can’t go back to the economy just before financial crisis hit because that economy no longer exists and is totally unattainable.

    Think about suppose we could go back to such an economy. Knowing what we know now, what would happen? The bubble would likely pop even sooner. People would know such a crisis is coming so they’d want to “get out early” before the bubble pops. But that would simply initiate the crisis again at a new and earlier date. As such that economy is simply no longer in the set of feasible outcomes. You might as well as wish for a time machine or some other impossibility.

    From the linked Klein article:

    Adam Posen is a member of the Bank of England’s Monetary Policy Committee, an adviser to the Congressional Budget Office, a senior economist at the Peterson Institute for International Economics and a leading expert on Japan’s lost decade. He doesn’t think we’re taking the threat of an extended period of crummy growth nearly seriously enough.

    When people worry about what comes next for the economy, he said in a speech to the Bank of England, they worry about a double-dip recession or a temporary period of deflation. Those, he explained, are not close to how bad things can get. “The risks that I believe we face now are the far more serious ones of sustained low growth turning into a self-fulfilling prophecy,” Posen said, “and/or inducing a political reaction that could undermine our long-run stability and prosperity.”

    What is amusing is that based on what I know of what Japan did we’ve done a damn good job emulating the Japanese in terms of propping up zombie banks. The similarities between the Japanese real estate bubble, its bursting, and the vast amounts of money injected into financial institutions to keep them from going under….sounds very, very similar.

    But even if we recognize that slow growth is an overriding problem that requires an aggressive response, what’s there to do about it? We stumbled into a world war last time, and the resulting fiscal stimulus got our economy back on track.

    Actually no. Private investment during WWII was dismal, in some years net private investment was negative. That is not going to promote long term growth. Also, consumption was very low, wages were held down by government fiat, and overall, the argument that the economy was growing is a dubious claim at best.

    For example look at unemployment. Sure sending millions of workers off to fight in a war is going to reduce unemployment when you look at the official statistics. But is this a good thing? If so why don’t we restart the draft now. We have two wars and I’m sure I’ve read somewhere that putting more boots on the ground would help. So we’ll kill two birds with one stone: lower unemployment and greater chance of success in Afghanistan.
    The problem is that the idea of being conscripted and going to war is not usually what one considers welfare enhancing. Which is why I consider Klein a blinkered fool.

    Also during the war, nondefense employment dropped. So the idea that the war brought prosperity to the labor markets depends on a rather disturbing world view that putting people who are unemployed at risk of death, dismemberment, and serious injury is a welfare improving policy.

    Also when you look at real output (real GDP) the basic official statistic is also suspect. GDP is concerned with final goods and services, but what are war materials? Are they a final good or intermediate good? I’d argue it isn’t immediately clear in that military goods are final goods. Simon Kuznets did considerable amount of work on GDP/GNP that suggests that the economic growth after the war was overstated and understates economic growth at the war’s end. For example, he had one series that showed GNP decreasing during 1943. Economists Nordhaus and Tobin argued that all military spending is regrettable an unfornate, although necessary, and removed it from being in GNP. Doing this GNP during the war years actually declined in 1942 and 1943 and didn’t reach its previous peak until after 1944. In any event, comparing what was largely a command economy (WWII) to a market economy (non-WWII) is a dubious comparison.

    In short, it is hard to see WWII as period of prosperity, yet that is often the claim. The economy didn’t really get back on track until after the war. A period when government involvement in the economy and fiscal spending were in retreat. I’ve argued before that Obama would do well to promote an environment that is hospitable to economic growth and business formation. However, he seems completely intent on doing just the opposite by increasing regime uncertainty.

Leave a Comment