The Myth of Structural Unemployment

Every economy I’m aware of is in some ways sub-optimal from a structural perspective. What’s more, free societies are dynamic places where things are changing and their citizens need to adapt to changes. Consequently, when severe problems arise it’s natural for pundits to start focusing attention on structural issues and proposing structural solutions, particularly since these problems can be identified with long-time hobbyhorses. But as Karl Smith argues in an excellent post, evidence for a structural shift in the American economy is quite hard to discern. What’s true is that we have a lot more unemployed construction workers than we had three years ago. But the quantity isn’t nearly big enough to explain the recession:


The simple fact of the matter is that the structure of the American economy hasn’t changed that much in that last 24 months. We were building houses at an unsustainable rate, sure. But, at its peak the US employed about 7.7 million construction workers. It now employees about 5.8 million. That’s a difference of a little less than 2 million workers or about 1.5% of the American workforce.

In October of 2007, the unemployment rate was at 4.4 percent. By January of 2008, it had risen to 5.4 percent. Then it dipped down a bit, but by July of 2008 it was at 6 percent, about the level you’d expect from 2.2 million construction workers losing their jobs. But then by Election Day it was all the way up to 6.5 percent. Between Election Day and Barack Obama’s inauguration, it increased two more percentage points. Then in the following year, it went up another 1.1 percentage points before very slowly starting to tumble.

This is, as Smith argues, not about the difficulty of shifting those construction workers into other segments of the economy. It’s about system-wide excess demand for money, and a failure of the policy department to respond appropriately.