Confronting the Unemployment Crisis

Policymakers seeking a path to economic recovery must first answer one crucial question:  Is our persistently high unemployment structural or cyclical?  If it’s cyclical, then monetary and fiscal measures designed to boost consumer spending will restore the US to full employment in due course.  But if we face a structural problem, then quick fixes won’t work until we correct deeper imbalances that have left 12.5 million Americans without jobs.

Correcting cyclical problems is primarily the Fed’s responsibility, through monetary policy.   In that case, we may be on the right track already – Chairman Bernanke labeled unemployment a “grave concern,” and the Fed’s latest round of quantitative easing aims to address it.

A recent unpublished paper, The United States Labor Market: Status Quo or a New Normal?, makes a strong case that the problem is indeed cyclical.  The authors, Edward Lazear, a Stanford Business School professor, and James Spletzer, of the US Census Bureau, presented their findings at the Fed’s Jackson Hole meeting in late August.  They examined labor market data from the last five years and concluded that there were “no structural changes that can explain movement in unemployment rates.”

On the other hand, recent research from Harvard Business School (HBS) identified a number of structural deficiencies that fall outside the scope of Lazear and Spletzer’s paper.  That research was part of a major initiative involving more than a dozen HBS professors and other scholars to examine US competitiveness among global economies.  The initiative’s findings were published in the March issue of the Harvard Business Review, and interviews with participating scholars were published in the September-October issue of Harvard magazine.

Undeniably, both structural and cyclical forces affect the US economy to some degree.   But the HBS research – because of its broader scope – presents a persuasive case that structural imbalances that built up mostly over the last 30 years are a major driver of current unemployment that will not be corrected quickly.

I’ll look at both sets of research, but first let’s examine what exactly leads economists to classify a problem as “structural.”

What is a structural problem?

Lazear and Spletzer considered several ways to define structural problems:  those which cannot be addressed by the Fed through monetary policy, those which cannot be addressed by either monetary or fiscal policies, those which are tied to an inadequate supply of labor, or those which relate to the composition of the workforce and the unemployed. 

The simplest definition, though, is that a structural problem is one which is long-lasting, such as a permanent mismatch between the supply and demand for labor.  To the extent that Lazear and Spletzer used a definition in their paper, it was this one.