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Home Publications Blogs Beat the Press There is No Evidence for the "Structural Unemployment" Story

There is No Evidence for the "Structural Unemployment" Story

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Monday, 20 September 2010 04:57

There is an effort by many of the economists who could not see the $8 trillion housing bubble that wrecked the economy to say that there is nothing that we can do about the damage because unemployment is structural, not cyclical. This means that the problem is that workers have the wrong skills for the jobs that are available or are in the wrong location. If this is the case, then the problem is not insufficient demand, the problem is with the workers who are unemployed. (Yes, this is another "blame the workers" story.)

The NYT lent space to Narayana R. Kocherlakota, president of the Minneapolis Fed, to present this argument. Mr. Kocherlakota referred to statistics showing a large number of job openings.

Actually, the statistics do not show that the number of job openings is anywhere close to the number of unemployed workers. The most recent data show the number of openings at just over 3 million, a bit more than 1 opening for every 5 unemployed workers. This is still down by more than one-third from pre-recession levels.

It is also worth noting that we don't see evidence of the other factors that would be consistent with growing structural unemployment. This mismatch story would imply that there are sectors of the economy in which wages are rising rapidly and average hours per worker are increasing, as employers increase hours due to their inability to find qualified workers. There is no major sector of the economy that fits this description.


[Addendum: the original mistakenly said "one opening for every unemployed worker," rather than one opening for every five unemployed workers. Thanks to Tom for catching this.]

Comments (23)Add Comment
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written by izzatzo, September 20, 2010 7:19
This mismatch story would imply that there are sectors of the economy in which wages are rising rapidly and average hours per worker are increasing, as employers increase hours due to their inability to find qualified workers.


It's true. For example, the reason lobbyists make so much and work such long hours is because of their rare and highly valued skills in gaining access to power. Until structural unemployment is addressed in the lobbying industry with more training and education from the supply side, the US will continue to wither away as these valuable jobs are outsourced across the border to offset the shortages. The problem has nothing to do with a lack of demand.
one case study
written by Bob Spencer, September 20, 2010 7:52
Let’s use my town of Charlottesville, Virginia as a case study of structural unemployment.

Before the housing bubble burst, 30% of all hourly wage earners were in construction. Now, lots of those guys are actually hunting wild game for their food.

At the same time, we have a large hospital and medical research center along with a university that has frozen all wages. Recently, nearly 1,000 nurses applied for 40 openings. I guess Mr. Kocherlakota assumes that the unemployed construction workers should become hospital administrators and other health care providers and compete with large numbers of other applicants. Is that what he means by structural unemployment?
How many job openings?
written by Tom, September 20, 2010 8:38
You wrote
The most recent data show the number of openings at just over 3 million, a bit more than one opening for every unemployed worker.


I thought that the number of unemployed was around 15 million, which would give 1 opener for every 5 applicants.
structural unemployment is about production not about job openings
written by ts, September 20, 2010 10:11
Construction, real estate, finance - all these sectors of the economy had bubble levels of production and employment. When the bubble burst, output and employment fell to more normal levels. While certainly not all employees in these industries have to work in residential construction jobs, many do. But these jobs will not come back in sufficient numbers to employ everyone, and many workers will have to make do in other jobs in other industries. At that point, many have a skills mismatch.

I find it curious when some economists look at JOLTS and use Beveridge curves to estimate structural unemployment, because I always had thought the problem was there were no jobs, period. The term was first used in the early 1980s to describe the auto industry where many jobs were lost due to automation and foreign competition. These jobs were not coming back so there were no openings to fill.
...
written by AndrewDover, September 20, 2010 11:05
All Mr K is saying is that fixing a 17% unemployment rate in construction will be hard for the Fed. Throwing more subsidies at the housing market, or using monetary policy would be less successful than simply starting construction projects as President Obama is talking about again. Extend the commuter lines, paint the roofs white, insulate, build dams, fix the water distribution systems, put the electric wires underground, build schools.
Jobs/Unemployed Garbled in Weekly Roundup
written by Hugh Gordon, September 20, 2010 11:18
This article as presented in the Weekly Roundup says that there are 5 jobs per unemployed worker. Obviously you mean the reciprocal.
Structural unemployment???
written by Ralph Musgrave, September 20, 2010 2:06

I agree with TS above that there is bound to be some structural unemployment stemming from the crunch in that some construction and real estate workers need to find jobs in other industries and learn new skills.

On the other hand the large majority of the unemployed are not construction or real estate employees. Plus labour turns over at an average rate of roughly 20% a year anyway, plus a majority of those changing jobs move to jobs which they describe as “very different” from their previous jobs. (That’s according to “A National Survey of the Unemployed” by W.W.Daniel, Ch 9).

Thus my hunch is that “construction industry structural unemployment” problem is a minor problem.
...
written by PeonInChief, September 20, 2010 2:30
If industries are really desperate for workers, they hire bodies and train them. That's what happened in the early 1980s with tech, and a couple of my friends did very well in bank-paid training programs. The reality is that we don't need workers and so don't put the money into training them.
...
written by skeptonomist, September 20, 2010 4:41
When conservatives talk about "structural unemployment" leading to high permanent levels of unemployment, they are usually claiming that workers do not have the education for "today's high-tech jobs" - it's all the workers' fault for not going to college. There is certainly a lot of unemployment in construction now, which is primarily the fault of the Fed and the financial industry, as Dean has been saying all along. Construction will eventually recover, but not until the inventory of foreclosed houses is cleared, again as Dean has been saying. Should all the construction workers retrain for jobs in banking? Banking and other financial industries are doing well now, but are likely to destroy themselves again before too long, since their practices have not changed much. Next time there may not be a bailout.
The illusions of macro-analysis.
written by rayllove, September 20, 2010 4:52
Dean Baker ~

"It is also worth noting that we don't see evidence of the other factors that would be consistent with growing structural unemployment. This mismatch story would imply that there are sectors of the economy in which wages are rising rapidly and average hours per worker are increasing, as employers increase hours due to their inability to find qualified workers. There is no major sector of the economy that fits this description."

For this to be true sectors would need to be analyzed on regional or local basis. Theoretically, based on nothing more than the simple laws of supply and demand, wages or hours worked in Detroit could be falling at the same rate that wages or hours worked are rising in Dallas and this would read as a wash in any nationally-based analysis. Detroit could have too many applicable workers for that sector while Dallas too few and this would of course fit the most classical definition for 'structural' unemployment.

And even if sectors were compared on a micro-scale as part of the "evidence" mentioned, the only way to know if a mismatch exists is via a comparison by occupations. This because an analysis by sector misses the obvious fact that sectors include people from a wide variety of vocations. Hospitals for example do not employ only doctors and nurses. A telling example is that of janitors being spread rather evenly across many different sectors yet if every janitor in Dallas were to simultaneously vanish... there would be a severe structural shortage that would not be noticeable in an analysis by sectors even if that analysis were applied on a local basis.
...
written by ralston mctodd, September 20, 2010 6:30
The Onion already explained why unemployment is high: people keep blowing their job interviews! No need to fall back on any of these fancy-pants "demand" excuses.
Mike Konczal's take on The Stagnating Labor Market
written by Ron Alley, September 20, 2010 10:47
Here are links to a very sharp analysis by Mike Konczal and Arjun Jayadev.

http://rortybomb.wordpress.com/

http://www.rooseveltinstitute.org/sites/all/files/stagnant_labor_market.pdf
Boy, Are These Economists Stupid or What?
written by Linda Lyons, September 21, 2010 1:18
It's surprising that the brightest of the bright did not see that the housing market was a rigged game of of an elaborate insurance fraud scheme by Wall Street. I lived in California in 2002 as home prices rose dramatically and I foresaw that people could not afford to buy these houses. I told my husband that there was "going to be a bloodbath of foreclosures." How can I be smarter than all these economists. It isn't even my area of expertise. I think they did know and took out insurance on the mortgage backed securities they knew were going to fail. That part of the picture I didn't know about. We average citizens are privy to the insider knowledge that is required to making a "killing" on Wall Street. What got killed was the economy. Not skills set changing. How did skill sets change overnight? They now want to blame th e worker for the lack of jobs instead of thousands of employers who've had to downsize because of the economic meltdown? Priceless. I think the economists should just shut their mouths until they can tell the rest of us how to scam the system. That would be information I can use.
construction jobs
written by Joe, September 21, 2010 3:23
I agree with TS above that there is bound to be some structural unemployment stemming from the crunch in that some construction and real estate workers need to find jobs in other industries and learn new skills.
That's cyclical employment because the lack of jobs is due to weak demand in housing. Jobs will come back once the inventory (excess supply) is cleared.

Structural employment relates to workers who have skills that are outdated, not skills that are temporarily unneeded due to weak demand.

Rise in unemployment related to real estate is cyclical, not structural.
Structural Healthcare
written by Bernie, September 21, 2010 5:24
The reason you don't see the number of job openings or wages rapidly rising and average hours per worker increasing in healthcare is the limits enforced by the government. In response the quality and availability of care has dropped.

My father retired as a RN and he still has a lot of friends that work at the hospital, they all tell the same story. They are severely understaffed. It is a crisis if anyone calls in sick because there is no one extra, the person on shift can't leave until someone is called in. Sometimes finding a call in takes hours!

My friends wife works in the burn unit of a different hospital, She is in full dress out all shift usually handling six patients. Each of these patients needs near full time care, she thinks she could adequately cover two patients at most.

There is an NPR segment and a NY Times articles "Too few geriatricians for an aging U.S"

These shortages are not because they have unfilled job openings. The hospitals cannot afford to hire more, the wages and hours are limited.

Most of the medical professionals don't quit because they believe in their jobs. They didn't come into the profession to get rich, but they are severely overworked and frustrated that they cannot provide an adequate level of care.

You're not going to see the traditional indicators of a shortage that your looking for. You need to evaluate the waiting times, accessibility, and ratios of care providers to patients to see the "structural unemployment".
...
written by Queen of Sheba, September 21, 2010 9:53
Bernie;
I'm sorry, I don't understand your post. You say: The reason you don't see the number of job openings or wages rapidly rising and average hours per worker increasing in healthcare is the limits enforced by the government.

Are you saying that the government limits the number of workers a hospital can hire if they have a larger patient load than can be handled by current staff? That can't be true. It may be true that the government may regulate the number of hours an individual doctor or nurse or technician can work in a given amount of time (for which patients should be thankful), but I seriously doubt the government tells hospitals they can't hire more staff.

Hospitals in my area add new staff all the time, and not just replacements. Any shortages in staff have to do with hospital hiring priorities or financial loss from slow or nonexistent payments for services or, in the case of publicly financed hospitals, lack of public funds.

Maybe I misunderstood your post.
...
written by MarkJ, September 21, 2010 9:53
"The hospitals cannot afford to hire more, the wages and hours are limited."

A disparity of income (differential) between officers and managers of the organization and the nurses and other caregivers could also explain this result.

Let's do the math. If CEC (corporate executive compensation) plus CGC (care giver compensation) is equal to TC (total compensation) of the organization then as the amount of CEC grows CGC will have to decrease all other variables being constant.

CEC + CGC = TC

Creating other classes of employees such as doctors and janitors in this simple exercise will not change the outcome.

It's simple. More money for corporate executive compensation equals less money for caregiver compensation.
Answers
written by Bernie, September 21, 2010 10:27
Yes Queen of Sheba, Thank you for responding.

The Medicare/Medicade re-imbursement rates are set by the Govenment. They are a set price that doesn't change based on supply shortages or demand excesses. The Government is also putting tremendous pressure on the insurance companies to keep premiums in check. The insurance companies look at the Medicare re-inbursment rates as a baseline but pay a slightly higher rate. This is why individual expenses for treatments are so high, thats the only place where you see a true market price.

Hospitals get that set ammount for each procedure, reguardless of the number or amount of employees. Instead you see labor shortages and long waiting times (sometimes months) for even critical lifesving procedures.

The wages of the Doctors and nurses are limited by these same influences, but the cost of training continues rising. Thats why there are enough doctors for the high profile specialties that affect mostly working age people(covered mainly by private insurace), but a huge shortage of geriatricians covered almost exclusivly by madicare.
to Mark J
written by Bernie, September 21, 2010 4:27
Your equation is off just a little. You need to add the number of employees vs the number of corporate execs.

An example pulled out of a hat, all numbers from google finance.

Five Star Quality Care, Inc. (Public, AMEX:FVE) has 22,000 employees. The CEO total compensation is $866,239. If you pay him nothing ($0) then 866,239 / 22000 = $40. Thats per year. Even if you assume the top 50 are making the same amount and you pay them all nothing, that gives each employee an additional $2000 a year. A nice raise, but hardly life changing.
Misinformation alert
written by rayllove, September 21, 2010 11:57
Joe and those mislead by Joe,

Wiki~

Structural unemployment is a form of unemployment resulting from a mismatch between the sufficiently skilled workers seeking employment and demand in the labour market. Even though the number of vacancies may be equal to the number of the unemployed, the unemployed workers may lack the skills needed for the jobs — or may not live in the part of the country or world where the jobs are available.

Structural unemployment is a result of the dynamics of the labor market and the fact that these can never be as flexible as, e.g., financial markets.[citation needed] Workers are "left behind" due to costs of training and moving (e.g., the cost of selling one's house in a depressed local economy), plus inefficiencies in the labor markets, such as discrimination or monopoly power.

Structural unemployment is hard to separate empirically from frictional unemployment, except to say that it lasts longer. As with frictional unemployment, simple demand-side stimulus will not work to easily abolish this type of unemployment.
...
written by cm, September 22, 2010 8:41
Bernie: "The Medicare/Medicade re-imbursement rates are set by the Govenment. They are a set price that doesn't change based on supply shortages or demand excesses. ...

Hospitals get that set ammount for each procedure, reguardless of the number or amount of employees."

One would think with more staff more procedures/billable items will be provided and charged? I would be surprised if the nurse services are not Medicare chargeable. Now if the problem is that charging 6 patient care units instead of 2 per nurse makes more money per nurse for the hospital "overhead" ... but that's nothing to do with the govt other than lack of oversight enabling this kind of fraud.
From Wiki (Caveat emptor)
written by Bernie, September 22, 2010 9:23
For institutional care such as hospital and nursing home care, Medicare uses prospective payment systems. A prospective payment system is one in which the health care institution receives a set amount of money for each episode of care provided to a patient, regardless of the actual amount of care used. The actual allotment of funds is based on a list of diagnosis-related groups (DRG). The actual amount depends on the primary diagnosis that is actually made at the hospital. There are some issues surrounding Medicare's use of DRGs because if the patient uses less care, the hospital gets to keep the remainder. This, in theory, should balance the costs for the hospital. However, if the patient uses more care, then the hospital has to cover its own losses. This results in the issue of "upcoding," when a physician makes a more severe diagnosis to hedge against accidental costs.[citation needed]
Unemployment and thinking out of the box
written by Jane A., September 24, 2010 6:53
Economics has defined three terms for types of unemployment: frictional, cyclical, and structural. But the global economy has allowed the formation of a new type of unemployment. The US economy has become very unbalanced. The financial crash and real estate downturn were simply that last straws that broke the camel's back. The US no longer has a jobs engine. Structural unemployment is when workers lack skills - but this is not the main problem in the US. The problem is that the jobs are not there. There is either insufficient demand OR jobs have gone to foreign countries.

I propose that the unemployment be given a new name: asymmetrical unemployment. This type of unemployment occurs when an economy is unbalanced and cannot generate sufficient jobs for its population. Developing countries have this type of unemployment - there just has never been a term for it.

This asymmetrical unemployment must be considered in the context of how it has occurred. It will take more than stimulus to reduce this type unemployment. Policy changes will be vital, and incentives and US tax changes will be required.

We need to deal with asymmetrical unemployment or the US will not be crippled for years; it will be the future of the US on a permanent basis. It will be one more step for the US in becoming a third world country.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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