Sunday, April 01, 2012

Which Type Of Unemployment Is The Biggest Problem?

Ben Bernanke raised this issue in a recent speech. See Fed Signals Resolve on Rates: Cheap Credit Still Needed Despite Recent Employment Gains, Bernanke Says by JON HILSENRATH And KRISTINA PETERSON of the Wall Street Journal. Excerpt:
"The Fed chairman took on some thorny economic issues in making his case for low rates. Among them is the question of whether the nation's still-high unemployment rate represented a so-called cyclical problem that can be resolved simply by encouraging economic growth with low interest rates, or a fundamental structural problem in the labor markets that growth itself and the Fed can't fix.

Mr. Bernanke came down on the side of those who argue the problem is predominantly cyclical and low interest-rate policies are helping to alleviate it. But many economists disagree with him, and he acknowledged the matter isn't settled.

The debate about cyclical and structural unemployment has been going on for a couple of years. Economists generally say cyclical unemployment is caused when weakness in the overall economy pushes down demand for goods and services and therefore the need for workers that provide them. Structural unemployment reflects deeper problems, such as a gap between the skills workers have and those that employers want. Structural problems don't necessarily disappear as the economic recovery gains traction.

Mr. Bernanke—in making his case for primarily cyclical unemployment—pointed out that newly unemployed workers and long-term unemployed workers all experienced diminished prospects of getting new jobs during and after the downturn. That suggests the job market hasn't punished one group of people disproportionately to others. Instead, he said, there weren't enough jobs for a wide range of workers in a wide range of industries. "The fact that labor demand appears weak in most industries and locations is suggestive of a general shortfall of aggregate demand, rather than a worsening mismatch of skills and jobs," he said.

But some economists disagree and the stakes are high. "You could be seeing a policy error in the making," said Wells Fargo economist John Silvia, who lists an array of factors that he says point to structural problems in the job market, which he says faster economic growth can't resolve.

Employment of college graduates is up 5.8% in this recovery, while employment of high school dropouts is down 3.9%, according to Labor Department data. This suggests that low-skill workers are having a harder time finding work.

Mr. Silvia also notes that unemployment is especially high in certain occupations, such as construction. It is also high in places, such as Nevada, where many people can't move because they owe more on their mortgages than their homes are worth. He worries that the Fed's low-interest-rate policies might cause inflation and do little to resolve deeply embedded unemployment problems."

The WSJ also had an article called Time Not on Side of the Jobless. It mentions:
"But some economists argue that in the wake of a severe recession, the lines between cyclical and structural unemployment can become blurred. Workers who lose their jobs because of cyclical factors—a factory that lays off workers, a restaurant that closes, an office that decides to go without a front-desk receptionist—might stay out of work so long that they become effectively unemployable. Their skills erode, they fall behind on the latest technologies and industry trends, or they become stigmatized by employers who assume there must be something wrong with anyone who's been unemployed so long."

I discussed similar issues in one of my earliest posts from back in 2006. It was called Edmund Phelps, Meet Harry Hopkins. Phelps is a Nobel prize winning economist and Harry Hopkins was an adviser to FDR

Other related posts:

Structural Unemployment In The News

Untangling the Long-Term-Unemployment Crisis

A Reversal Of Structural Unemployment?

Robot Journalists-A Case Of Structural Unemployment?

Some Reasons Why Firms Are Not Hiring

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