Cycles and Structures

Writing in The New Yorker, James Surowieczki trods familiar ground in wondering why unemployment has stayed so stubbornly high:

The structural argument sounds plausible: it fits our sense that there’s a price to be paid for the excesses of the past decade; that the U.S. economy was profoundly out of whack before the recession hit; and that we need major changes in the kind of work people do. But there’s surprisingly little evidence for it. If the problems with the job market really were structural, you’d expect job losses to be heavily concentrated in a few industries, the ones that are disappearing as a result of the bursting of the bubble. And if there were industries that were having trouble finding enough qualified workers, you’d expect them to have lots of job vacancies, and to be paying their existing workers more and working them longer hours.

As it happens, you don’t see any of those things. Instead, jobs have been lost and hiring is slow almost across the board. Payrolls were slashed by five per cent or more not just in the bubble categories of construction and finance but also in manufacturing, retail, wholesale, transportation, and information technology. And take hiring: one of the industries that have been most cautious is the hotel and leisure business. Needless to say, there’s no shortage of people with the skills to be maids or waiters; there just isn’t enough work. Another sure sign of weak demand is that people with jobs aren’t deluged with overtime; hours worked have barely budged in the past year.

I seem to recall that Paul Krugman made a very similar point about a month ago. Yes, here it is:

There’s a story behind why that might happen — it might happen because unemployed workers have the wrong skills, or they’re in the wrong places, or they can live so well off the dole that they don’t really want to work, or whatever. But the measure of structural unemployment is that worsening of the inflation-unemployment tradeoff. So, for example, the demonstration that Britain suffered a large rise in structural unemployment in the late 70s through the 80s was the way inflation took off in the late 80s, even though the unemployment rate was quite high by historical standards.

Once you realize that’s what it’s about, you see that many of the things people say show a rise in structural unemployment don’t really bear on the issue. You say we had a big bubble in the past? OK, but that doesn’t explain why trying to raise employment now would cause inflation. You say that we’ve been living beyond our means? OK, but again, why does that limit the number of workers we can employ making stuff for somebody?

I think they may be defining both “structure” and “cycle” far too narrowly. The conventional business cycle, the interaction between supply and demand, inventories and sales, isn’t the only cycle that affects business. As I’ve documented here previously there’s some evidence that the present economic downturn is being influenced by generational change, a cycle that is measured in decades or even centuries rather than months and years.

There are other factors involved that I think we might deem structural. As the 2010 census has revealed over the last decade much of the increase in our population has been due to immigration from Mexico. When a Mexican worker comes to the United States and sends a good portion of his wages back home to Mexico that portion of his wages isn’t producing increased economic activity here in the United States, it’s producing increased economic activity in Mexico. I wonder what the economic story of the last couple of decades would be if the United States, Canada, and Mexico were considered as a unit rather than distinctly?

Does China’s practice of using the dollars it receives for the goods it produces to buy Treasury notes rather than to buy American goods constitute another sort of structural change? Does Ricardian comparative advantage continue to work under the present circumstances? It may be that China will eventually use its stock of dollars to buy real goods but I’m guessing that at least some of the goods it buys will come in the form of arable land.

I also have a sneaking suspicion that we’re asking the wrong question. Rather than wondering why unemployment is so high now we might well consider why it has been so low over the period of the last 15 years. We have had two successive bubbles, one more extreme than the last.

Absent those bubbles what would the employment picture have been in the United States over the last 15 years? I think you’ve got to look a lot farther than the last five or even ten years to find the source of our present problems.