Friday, October 8, 2010

What is the Structure of Unemployment?

The "structural vs. low demand" debate has been going on for awhile.

But the national figure hides a sharp divergence between rust-belt manufacturing states in the north and east, where unemployment is high but new job losses have fallen, and Sunbelt states in the south and west, where the labour market remains in flux.


This pattern provides a clue to a vital policy debate: does high unemployment just reflect weak demand, in which case the Federal Reserve might be able to do something about it by launching a new round of asset purchases? Or is it a structural problem, showing that workers are in the wrong place or have the wrong skills, in which case monetary policy can do little?


Eric Rosengren, the president of the Boston Fed, noted that across the country job losses have been spread across a range of different industries.

“If all the loss was in construction then that’s a structural change, but that’s not the pattern we’ve seen,” he said in an interview with the Financial Times. Mr Rosengren’s colleague, Narayana Kocherlakota, Minneapolis Fed president, has made the reverse argument in speeches.

“Firms have jobs but can’t find appropriate workers. The workers want to work but can’t find appropriate jobs,” he said.

Mr Kocherlakota pointed out that the number of job openings has recovered but unemployment has not fallen in proportion. That implied something was preventing people from taking the available jobs. Mr Kocherlakota estimated that up to 2.5 percentage points of today’s unemployment was the result of the mismatch between jobs and workers.

In the rust-belt states much of the surge in unemployment was caused by the woes of the car industry. That rush of job losses has ended but it almost certainly left behind some workers whose location and skills meant they would struggle to find jobs, even if there were strong demand for labour. That was probably true before the recession as well, however: Michigan had a 7 per cent unemployment rate during the boom of 2006-07.

An argument for geographic mismatch is North and South Dakota. There unemployment is below 5 per cent, yet the states are not so distant from Michigan, at 13 per cent. As Lawrence Mishel of the Economic Policy Institute pointed out, however, these states are small and their workforce would have to expand vastly to absorb the unemployed from a state such as Michigan

Here is a link to the Boston Fed's study.

Here is a link to the Minneapolis Fed's study.