Is there a non-"structural" explanation of a macro-cycle?

|Peter Lewin|

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? 

Comments

[marcus nunes]

Peter
Think "NGDP":
http://thefaintofheart.wordpress.com/2012/09/01/more-implied-criticism-of-fed-policy-coming-out-of-the-jackson-hole-conference/

[Allan Walstad]

"And when unemployment fell from 2009 to 2012, those same industries accounted for the majority of the change."

But unemployment did not fall back to where it was, right? And GDP, even though growing again, is far below the previous trend line. There IS a structural problem, namely, that the structure of production was distorted by interventionism, particularly credit expansion. Once the structure of production is distorted, output almost certainly must fall, at least below what it otherwise would have been. This could translate into reduced wages or reduced employment, depending on the specifics, particularly on continued intervention that may tilt the incentives toward reduced employment. What matters is that the structure of production be repaired, and this can only happen through the efforts of entrepreneurs operating in a market where price signals are not distorted. So what if unemployment went up mainly in some industries and then came part of the way back down mainly in those same industries?

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[Jonathan M.F. Catalán]

The two aren't necessarily mutually exclusive. Changes in aggregate demand can be associated with the progress of structural adjustment, in that "inadequate" aggregate demand usually coincides with slow progress in resource reallocation. Likewise, faster reallocation means higher aggregate demand, since more firms are partaking in the process by investing. I expand upon this point here: "Structural Misunderstanding."

[Troy Camplin]

"Lazear asserts (correctly in my view) that such fundamental phenomena could not have changed that quickly."

Whether or not it did, it is simply not true that it could not have changed that quickly. The punctuated equilibrium model explains how exactly these kinds of rapid changes occur. And it is possible that labor could have gone from an equilibrium around 4-5% unemployment and then jumped to one 8-9%.

Again, this is not to say that this is in fact what has happened, but we do have the models that would explain how such a sudden change would be possible.

[Jerry O'Driscoll]

I take Peter as being most concerned with the meaning of "structural." A structural change could result in a rise in the natural rate of unemployment. That increase is not the structural change, but it's consequence.

The claim that a structural change has caused the natural rate to rise dramatically in a few years is, in my opinion, more based in politics than economics. If such a change occurred, then the president and the Fed are exculpated from responsibility for persistently high unemploymet. Pardon me if I reject that thesis.

The distinction used to be made between secular (permanent or changes in trend) changes and cyclical (temporary or self-reversing changes). They are not so easily disentanged. This is a literature on why cyclical downturns result in permat changes. One wonders if, in retrospect, this will be an element of the explanation of the persistence of high unemployment.

[McKinney]

Reports indicate that productivity increases are responsible for some of the unemployment. I would say that is a structural change.

Of course, productivity increases are good in the long run, but it may take a while for the increased welfare to show up in jobs.

[Peter Lewin]

I think what Jerry said is exactly right. The persistence in high unemployment has taken many by surprise (though many also predicted it - many Austrians included). But, after the fact, the surprised are going to resort to "structural" explanations.

The rise in productivity is, at least in part, a statistical artifact. Fewer workers has resulted in higher measured output per worker. Also, it is the result and not the cause. Productivity always rises in recessions, statistically, and because businesses economize on labor.

Troy, when I say that the NR could not have changed that quickly I am talking empirically-historically, not as a general proposition.

[Harrison Searles]

"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?"
I find Lazear to be question-begging here. He rejects structural problems in the economy and suggests all we have to do is "grow the economy." However, how can we possibly grow the economy if we do not know what is wrong with it?

Surely there must be something more wrong with the economy than simply a lack of technocratic will to grow it.