The summer of 2010 saw the release of some anomalous job opening data that led many people to opine that mass unemployment in the United States was largely a structural issue incapable of being remedied through demand-stimulation. This argument has never made any real sense. Minneapolis Fed President Narayana Kocherlakota calculated that absent structural factors unemployment would be around 6.5 percent rather than at 9.6 percent and said “it is hard to see how the Fed can do much to cure this problem.” The natural response has always been that the Fed should increase aggregate demand to reduce the unemployment rate by 1.5-2 percentage points. But now the data on which those analyses was based has been released and Mike Konczal shows that the revisions imply that structural unemployment estimates based on it were far too high.
We also have a new IMF working paper (PDF) from Jinzhu Chen, Prakash Kannan, Prakash Loungani and Bharat Trehan which estimates that structural unemployment accounts for a small share of total unemployment but a much larger slice of the long-term unemployment problem:
We provide cross-country evidence on the relative importance of cyclical and structural factors in explaining unemployment, including the sharp rise in U.S. long-term unemployment during the Great Recession of 2007-09. About 75% of the forecast error variance of unemployment is accounted for by cyclical factors—real GDP changes (Okun‘s Law), monetary and fiscal policies, and the uncertainty effects emphasized by Bloom (2009). Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25 percent. For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession.
In neither case is complacency the right issue. It makes perfect sense to hypothesize that a large share of the long-term unemployed are being frozen out of employability for various reasons and even as we ought to be increasing aggregate demand we also ought to be responding to the special challenges posed by the long-term unemployed. That probably means something on housing and relocation, something in terms of retirement/disability policy for older folks, and a lot in terms of training and active labor market policies for younger people.
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