Gavyn Davies Says: Double Dip
No, I Don't Know Why Kevin Hassett Bothers. No, I Don't Know Why Bloomberg Prints Him

Identifying Cyclical vs. Structural Unemployment: A Guide for Slate Writers

Over at Slate, James Ledbetter says that he cannot referee between the two gangs of economists warring over the causes of high unemployment.

But he is wrong.

He can.

Here is how:

Suppose that you have not cyclical unemployment generated by a collapse in aggregate demand but structural unemployment generated by mismatch, suppose you have a situation in which the structure of demand by consumers is different from the jobs that workers are capable of filling. Suppose--this is Berkeley, after all--that we were in a nice equilibrium in which some workers were baristas making lattes and other workers were yoga instructors teaching classes and that all of a sudden we have had a big shift in demand: that consumers decide that they want few moments of wired, frenetic caffeination and more moments of inner peace.

What would we expect to find happening?

We would expect, first, coffee bars to stand empty as people hoarded their quarters for the next yoga lesson. We would expect coffee bars to fire baristas, and to close down. But we would also expect yoga studios to be crowded, and yoga instructors to be teaching extra classes, and working long hours, and raising their prices, and training ex-baristas to chant properly, do the downward-facing dog and the lizard, and teach others how to achieve inner peace.

The size and duration of the excess unemployment of ex-baristas might be substantial and long-lasting. It takes quite a while to retrain a barista as a yoga instructor. Those seeking training might have a difficult time getting the attention of and apprenticing themselves to the yoga instructors doing land-office business--given how mercenary and grasping and eager to catch the wave of the market we all know yoga instructors to be.

But depression in the coffee-bar sector and unemployment among ex-baristas would be balanced by exuberance in the yoga-studio sector, rising prices for yoga lessons, and long hours and high wages for yoga instructors.

That is what "mismatch" structura unemployment looks like--one sector depressed with a lot of idle excess labor, a second sector booming with rising wages and prices.

What do we have in America today?

Well, over the past three years...

  • employment in logging and mining has risen by 11 thousand
  • employment in construction has fallen by 2.1 million
  • employment in manufacturing has shrunk by 2.4 million
  • employment in wholesale trade has fallen by 437 thousand
  • employment in retail trade has fallen by 912 thousand
  • employment in transportation and warehousing is down by 333 thousand
  • employment in publishing, except internet is down by 147 thousand
  • employment in motion picture and sound recording is down by 34 thousand
  • employment in broadcasting, except internet is down by 41 thousand
  • employment in telecommunications is down by 54 thousand
  • employment in financial activities is down by 921 thousand
  • employment in professional and business services is down by 1.3 million
  • employment in educational services is up by 197 thousand
  • employment in health care is up by 789 thousand
  • employment in leisure and hospitality is down by 467 thousand
  • employment in other serivces is down by 32 thousand
  • employment by the federal government is down by 330 thousand
  • employment by state and local governments is down by 127 thousand.

All this in the decline from 137.83 million people employed in July 2007 to 129.95 million people employed in July 2010--a 7.88 million decline in employment during a period in which the adult population has grown by 6 million.

I see employment growth in (a) internet, (b) health care, and (c) logging and mining. I see employment declines everywhere else.

That does not look like a story of "mismatch" unemployment--in which demand shifts in a direction that the existing labor force cannot cope with, and the result is structural unemployment in declining sectors and occupations and boom times and rising wages and prices in those sectors and occupations to which demand has shifted. That does not look like that at all.