An interesting, but (to me) confusing editorial by Ed. Lazear appeared recently in the WSJ here. He argues “There Is No ‘Structural’ Unemployment Problem” that, “A look at the skill-jobs mismatch finds no evidence that changes in the economy explain high joblessness. The problem is slow growth.”
Though the article contains some interesting numbers, its central theme begs more questions than it answers. What does he mean by “structural” (interesting that he uses scare quotes in the headline)? And what is the cause of slow growth, or the cure for it?
The unemployment rate has been above 8% for three years. In 2007 it was 4.4%. “Two years later, it reached 10%.” Pretty dramatic. Lazear confronts the assertion that the “structural” determinants of employment may have changed. Clearly he has in mind the relatively immutable, or at least slow-changing determinants of what we now call the natural rate of unemployment. Some might wish to offer such a “structural” explanation of lingering high unemployment. Lazear asserts (correctly in my view) that such fundamental phenomena could not have changed that quickly. I would add there is no reason to expect them to have changed at all. The central bank and the treasury cannot be exonerated that easily.
Lazear (and his coauthor James Speltzer) have investigated this “structural story” in more detail. Though referring to the skills-mismatch of the labor force (we might say its human capital structure), they investigate the employment situation across industrial sectors – the implication being that different industries require different skill-sets. (This carries its own set of structural assumptions – a kind of fixed production coefficient picture). It turns out that the dramatic rise in unemployment can be accounted for primarily by a few industries – the usual suspects from previous downturns – construction, manufacturing and retail. And when unemployment fell from 2009 to 2012, those same industries accounted for the majority of the change.
So, “whatever mismatch exists today was also present when the labor market was booming. Turning construction workers into nurses might help a little, because some of the shortages in health and other industries are a long-run problem. But high unemployment today is not a result of the job openings being where the appropriately skilled workers are unavailable.” Within industries there is a mismatch between managers and workers, but this is not new.
What to make of this? First, disaggregation by industry may yield more insight. Considering the period 2001-2012, including the telecom boom-bust, one may find plenty evidence of “mismatched” capital investments, business ventures that failed and had to be “restructured” – implying the need to redeploy specific capital to where it could be employed. I would love to collaborate with a motivated investigator to bear this out. If so, the question is what explains this “mismatch”?
Second, if, as Lazear asserts, there is no “structural” distortion, what explains the cycle? What explains the lack of growth? And why so precipitous? He says, “All we need to do is grow the economy. Unfortunately, current policies aren’t doing that.” So do we learn much from this editorial unless we know what those policies are and what they ought to be?