There Is No "Structural" Unemployment Problem

September 7, 2012

The unemployment rate has exceeded 8 percent for more than three years. This has led some commentators and policy makers to speculate that there has been a fundamental change in the labor market. The view is that today's economy cannot support unemployment rates below 5 percent -- like the levels that prevailed before the recession and in the late 1990s, says Edward P. Lazear, a professor at Stanford University's Graduate School of Business and a Hoover Institution fellow.

Research Lazear has done with James Spletzer of the U.S. Census Bureau shows that the problems in the labor market are not structural. They reflect slow economic growth, and the cure is a decent recovery.

  • In 2007, the unemployment rate was 4.4 percent.
  • Two years later, it reached 10 percent.
  • The structure of a modern economy does not change that quickly.
  • The demographic composition of the labor force, its educational breakdown and even the industrial mix did not differ much between 2007 and 2009.

"Mismatch" is another measure of structural maladies in the labor market. Mismatch can take a number of forms, but the most important is industrial or occupational mismatch, in which industries that have many job openings have few unemployed workers with the requisite skills, and industries with many unemployed workers do not have job openings.

Lazear and Spletzer find that mismatch increased dramatically from 2007 to 2009. But just as rapidly, it decreased from 2009 to 2012. Like unemployment itself, industrial mismatch rises during recessions and falls as the economy recovers. The measure of mismatch that they use, which is an index of how far out of balance are supply and demand, is already back to 2005 levels.

That is not to imply that we are back to where we should be. The unemployment rate is currently 8.3 percent, well above the 5 percent level that we can aspire to maintain.

The reason for the high level of unemployment is the obvious one: Overall economic growth has been very slow.

The evidence suggests that to reduce unemployment, all we need to do is grow the economy. Unfortunately, current policies aren't doing that. The problems in the economy are not structural and this is not a jobless recovery. A more accurate view is that it is not a recovery at all.

Source: Edward P. Lazear, "There Is No 'Structural' Unemployment Problem," Wall Street Journal, September 3, 2012.

 

Browse more articles on Economic Issues