links for 2010-09-25
Liveblogging World War II: September 26, 1940

High Structural Unemployment Leads to Rising Inflation When Unemployment Falls

Paul Krugman:

What Structural Unemployment Looks Like: One thing I should probably make clear in this discussion of structural unemployment is that I have no problem in principle with the idea that shifts in the economy can temporarily lead to a large rise in the “natural” rate of unemployment. Let me offer a case in point: it was quite clear, circa 1990, that Britain was no longer capable of running unemployment rates as low as those of the 1960s and early 1970s.

But how did we know this? First, through experience: the Lawson boom of the late 1980s never brought unemployment below 7 percent, yet it was accompanied by a sharp rise in inflation. Clearly, the economy was hitting speed limits even at relatively high unemployment by previous standards.

And all the kinds of mismatch so conspicuously not present in America today were very clearly in evidence in Britain during the 1980s. Think "Full Monty." There were large regional disparities in unemployment, with the south and east doing well but the north and west deeply depressed. There were obviously declining industries — steel, coal, shipbuilding — coupled with rising service and financial sectors. Times were terrible for blue-collar workers, not so much for white-collar.

In a way, the key insight about America now is that it doesn’t look at all like Thatcherite Britain. Legend aside, this is not mainly about displaced construction workers — and there are no other dying industries to point to. Lousy labor markets span the country, except in a handful of states with almost no people. It’s a terrible job situation for college graduates as well as high-school graduates.

The idea that this economy is primarily suffering from mismatch is simply bizarre.