Friday, September 24, 2010

Slow Recovery Of Job Market Raises Concerns Of Structural Weakness

The labor market has remained relatively flat for an extended period, which raises concerns that the cause is structural unemployment. It is difficult to distinguish whether unemployment is structural or just recovering very slowly, and there are very limited policy options in the short-term for the former scenario. See the following post from The Capital Spectator.

Today’s update on new jobless claims for last week is a reminder that the labor market is still stuck in neutral. After a month of declines in new filings for unemployment benefits, the trend reversed last week. New claims jumped 12,000 for the week ending September 18, the government reported. That’s discouraging, but nothing’s really changed in terms of the broad trend this year. We're still going nowhere fast in the labor market.

As the chart below shows, seasonally adjusted jobless claims have been treading water this year by holding steady in roughly the 450,000-500,000 per week range. There's lots of volatility from week to week, but so far in 2010 there's nothing really new under this sun. That’s a sign that the labor market is struggling to generate new jobs on a net basis. That's discouraging news, but it's also old news.

But make no mistake: The longer the job market remains stuck in a rut, the stronger the case for arguing that we’re suffering a potent bout of structural unemployment. If so, the odds are lower--perhaps a lot lower--that a new round of monetary and/or fiscal stimulus (assuming they're tried) will provide any kick to the economy from here on out.

Is this a real and present danger? Is the high jobless rate even worse than it seems because of structural unemployment? Brad DeLong, an economics professor at the University of California at Berkeley, defines the problem and agrees that this particular disease is challenging. The good news (relatively speaking), he advised recently, is that fears of structural unemployment are overdone:
Let me be the first to say that structural unemployment is a true and severe danger. When people who in other circumstances could be happy, healthy, and productive members of the workforce lack the skills, confidence, social networks, and experience needed to find work worth paying for, we obviously have a problem. And if unemployment in Europe and North America stays elevated for two or three more years, it is highly likely that we will have to face it. For nothing converts cyclical unemployment into structural unemployment more certainly than prolonged unemployment.

But is that true today? Does it look right now as if the biggest problem facing the economies of Europe and North America is structural unemployment? It does not.
But lots of folks disagree. And for the moment, you can argue either side. “The economic recovery remains painfully slow and the proof of this is companies are still reluctant to hire,” Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ, tells Bloomberg News today. “Those who lost their jobs in this recession will have to wait because the economy’s wheels are not turning fast enough to employ them.”

Is that evidence of structural unemployment, or a sign that the cyclical jobless rate is rebounding slower than usual? It’s hard to say for sure at this point, which is why the structural unemployment debate is still alive and kicking.

“The distinction between cyclical and structural unemployment may be well defined in theory, but it is not at all clear in practice,” notes Adolfo Laurenti, deputy chief economist at Mesirow Financial, in a research note last week. “Jobs are being created and lost both during expansions and recessions, and the dynamics that may appear obvious at an aggregate level are far from obvious when look at micro-data. Structural changes may be more apparent when associated to secular shifts across sectors (e.g., the decline in manufacturing employment), but harder to detect when taking place within industries and firms (e.g., when new technologies and equipment change the mix of skills to operate plants).”

If structural unemployment is in fact upon us, are there no policy options? It’s not quite that bad, Laurenti reminds, but there are no easy or quick fixes. Overall, Laurenti advises against “short-term fixes that would make the labor market more rigid, preventing the market to adjust to the new economic realities.” Instead,
We should focus on programs that facilitate, rather than hinder, the underlying changes taking place in the economy. From re-training programs to the portability of healthcare benefits, from the revision of the way unemployment benefits are calculated, to having them progressively phased-out rather than abruptly interrupted, there are many options to make incentives more aligned with the dynamics of the market process. The preservation of flexibility in the U.S. job market is of paramount importance.
But all that takes time, and a fair amount of political horse trading. The new normal, it seems, isn’t about to fade away any time soon. Unless the struggling labor market really is just recovering a lot slower this time. Unfortunately, it’s hard to tell the difference at the moment.

This article has been republished from James Picerno's blog, The Capital Spectator.

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