Cyclical or Structural?

by Elaine Schwartz    •    Oct 9, 2010    •    624 Views

Economists still cannot agree. With the new unemployment rate, at 9.6%, the same as the old unemployment rate, one question remains the same. Is it a jobs mismatch, contractionary lay-offs, or a third economic ailment? The diagnosis you choose will determine the policy you support.

On the structural side are those who say that the high unemployment rate is the result of too many unemployed workers who cannot fit the jobs that are available. As expressed by the President of the Federal Reserve Bank of Minneapolis,  the s ources of the mismatch are probably a combination of geography, demography, and skills. The policy implication: the Federal Reserve cannot do very much. While this gentleman suggests more unemployment insurance, others have a more laissez-faire inclination.

Cyclical advocates say that high unemployment is the result of inadequate demand from consumers, businesses, and government. With sluggish economic growth and tepid business confidence, we have moved from the trough of this business cycle to an anemic expansion. As expressed by the former Chair of the Council of Economic Advisers, Christine Romer:

In short, in my view the overwhelming weight of the evidence is that the current very high — and very disturbing — levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one.  It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis.  Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”; but my chief of staff suggested that I find something a tad more dignified.

The policy implication? More stimulus and “QE2” (quantitative easing).

Yet another group of economists rejects the structural diagnosis and then moves onward to other problems such as a “balance sheet” recession. You might want to go here to see what other economists have suggested in an online Economist debate.

The Economic Lesson

Structural unemployment takes us to buggy whips and typewriters. When the former was replaced by the Model T and the latter became obsolete because of computers, workers with traditional skills lost their jobs while those who could make the new goods and services were in greater demand. What happened? The structure of the economy changed as old industries died.

Cyclical unemployment is about the business cycle. Like death and taxes, we will always have a business cycle. 1) First, production grows. 2) Then it hits a peak. 3) Reversing, it stagnates and declines. 4) It reaches a trough. A lagging economic phenomenom, cyclical unemployment is most evident when the economy is at its lowest and also as it begins its expansion.

Then, a new cycle begins, it reaches a new and higher peak, and you know what happens next.


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