Structural unemployment–the latest dirty phrase

With the Fed running out of ammunition, second round of downward revision of quarterly GDP, continuation of toxic political climate, and stubborn unemployment numbers, the press is waking up to the idea that maybe it’ll take very very long, if at all, to climb out of this recession. New York Times argues that the for now, wait-and-hope seems to be the only viable prescription, while employment remains friendly to double digits. Economist says that lack of demand itself (or even relatively generous unemployment benefits) cannot explain the stubbornly high unemployment. A new theory proposes that structural unemployment (unemployment occurring primarily because of mismatch of labor force’s skills and demand for skills in the market) has crept up from the usual 5% to a higher number, perhaps 6.5 or 7%. Persistent cyclical unemployment and technological underemployment are also adding more than usual to this phenomenon.

Potential direct causes of the structural unemployment-

  • Substantial skill gap: The labor force that was most directly hit was involved in home-building and construction. There are very few jobs for them at the moment, and the jobs that do exist, cannot use their skills. This is obvious.
  • Record home-ownership coupled with negative home equity: Despite the mortgage crisis, home-ownership is at its historic record and the federal government is trying its best to prop up the American dream. But, home-ownership also leads to limited mobility of the workforce, especially during times when home owners have to sell their biggest investment at a loss to make the move. Setting aside the quandary faced by those with negative home equity, a recent article by the Philadelphia Fed suggests that government’s focus for the last 70 years on home-ownership might not be as valuable as it has been thought to be, and the tax benefits might be smothering consumption by as much as 1%.
  • Prevalence of dual-earner model: Many households need both the partners to work to support their lifestyle. This adds to the mobility problems, since moving means searching for jobs for both the partners.
  • Outsourcing of jobs outside US: This is a politically sensitive topic. Even if ones disagrees, it’s worth looking at a simple statistic–the cash-pile of the US corporations. The corporations are sitting at $837 billion of cash–enough to employ 6m people for 2 years at an average salary of $70k. Obviously, zero-cash is not desirable, but it is instructive to note that spending this cash would bring unemployment down by about 4% (assuming a labor force of 150m) to 5.7%, a number that the President would give an arm and a leg for. For the last decade and so, the political climate has allowed corporations to outsource jobs because two bubbles (IT and housing) masked the underlying change at a macroeconomic level. I wouldn’t be surprised if the political climate moves sharply against this, and new taxes and regulations are issued to curb this.

My closing thought is that barring a sudden emergence of a new big industry, or resurgence of a few dying industries, US will need a few significant structural and politically sensitive changes to bring back the unemployment rate near 5% again.



  1. Would it just make plain sense for the Govt to use the money to help retool the mortgages. That is allow sellers to sell. The Loss is used as a tax rebate or something which allows the home buyers to sell. The new owners buy the house at this stipulated price but do not have the option to sell straightaway. And then methods to curb speculation selling/buying. You get the idea.

    But I wonder if that would help clear up this foreclosure mess and help the economy recover

  2. Govt is already supporting the housing in two big ways–Fannie and Freddie are supporting more than 90% of the loans, and the Fed is buying trillions of dollars worth of mortgages.Under the idea, with depressed home prices, govt. will end up taking even more losses.

    The idea will not pass the current political climate at all, and even if it could, there are better places that the govt. could spend money on (see CBO director Doug Elmendorf’s presentation to the Senate Budget Committee- Page 5 has the key chart if you’re in a hurry.)

    Let’s not even throw robo-signing in the mix.

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