David Brooks is just making this up out of thin air: Structural vs Cyclical Unemployment Edition
RECENTLY I discussed the fallacies contained in the arguments underpinning Senator Susan Collins’ legislation that the ACA is or will cause a drastic shift in the labor market from full-time to part-time work. The problem with Collins’ legislation–and the arguments underpinning it–is that it seeks to treat the problems in the labor market with the wrong cure. Simply stated, the recent downturn in the economy and labor market is a cyclical problem–slack demand where consumers fail to purchase goods, fewer purchases means business incomes decline, which results in businesses laying off workers to reduce costs, and so on. Collins’ legislation basically wants to ignore the cyclical cause of the recent economic downturn, and instead argue that the ACA–not yet full implemented, and passed by Congress after the economy tanked–is what ails the labor market/economy.
Another group of pundits and policymakers who would like to ignore the cyclical nature of the economic downturn and weak labor market are those who argue the problem in the labor market is structural rather than cyclical. Specifically, that businesses want to hire, but are unable to find employees with the requisite skills. This is otherwise known as the skills gap, and it is receives way, way too much legitimacy in public discourse. Among those espousing it in such discourse recently was the NY Times’ David Brooks during his appearance on PBS to discuss the recent Jobs Report as well as the economy in general. Here is what Brooks had to say about the employment situation:
Yes, I think there’s a consensus growing both on left and right that we — the structural problems are becoming super obvious.
So when the — this recession started a number of years ago, you had 63, something like that, out of 100 Americans in the labor force. Now we’re down, fewer than in — than when the recession started. And so that suggests we have got some deep structural problems. It probably has a lot to do with technological change. People are not hiring — companies are not hiring human beings. They’re hire machines.
It probably has to do with a skills shortage, that as technology increases, skills have got to keep up and skills are just not keeping up. It has to do with some sociological changes, men dropping out of the labor forces, women, and especially young women, never entering the labor force.
And so these are deep structural changes. And I think there’s a consensus growing that something really fundamental has shifted in the economy. And I wouldn’t say anybody in the political arena has much of a set of solutions the way they did in the progressive era, the New Deal era, even the Reagan era, that are commensurate with the size of this problem.
Dean Baker does a full analysis of what Brooks got correct throughout his PBS appearance (which is somewhere between zero and nothing), but I want to focus on the issue of Brooks’ argument that we are experiencing structural unemployment. First, there is no consensus, as Paul Krugman (citing the work of conservative economist Edward Lazear), Scott Sumner, Dean Baker, and Brad DeLong all note. Second, the reason there is no consensus is because there is absolutely no evidence of a skills gap in any industry. What evidence should we see? For those industries where there is a skills gap, businesses would have an increased demand for those sparse skills, which in-turn would increase wages and hours for workers in those industries. However, we aren’t seeing increases in hours or wages in any major industry:
As the BLS July Jobs Report released on Friday indicated, hours and wages were largely stagnant. Moreover, as Krugman notes in his piece, Lazear wrote regarding the issue of structural vs cyclical unemployment:
The recession of 2007-09 witnessed high rates of unemployment that have been slow to recede. This has led many to conclude that structural changes have occurred in the labor market and that the economy will not return to the low rates of unemployment that prevailed in the recent past. Is this true? The question is important because central banks may be able to reduce unemployment that is cyclic in nature, but not that which is structural. An analysis of labor market data suggests that there are no structural changes that can explain movements in unemployment rates over recent years. Neither industrial nor demographic shifts nor a mismatch of skills with job vacancies is behind the increased rates of unemployment. Although mismatch increased during the recession, it retreated at the same rate. The patterns observed are consistent with unemployment being caused by cyclic phenomena that are more pronounced during the current recession than in prior recessions.
Further still, Krugman writes:
Indeed: one strong indicator that the problem isn’t structural is that as the economy has (partially) recovered, the recovery has tended to be fastest in precisely the same regions and occupations that were initially hit hardest. Goldman Sachs (no link) looks at unemployment in the “sand states” that had the biggest housing bubbles versus the rest of the country; it looks like this:
[Which can help explain Maine's tepid growth vis-a-vis the rest of the nation]
There are two problems that result from the Brooks (and to a certain extent, Collins) theory behind unemployment. First, if policymakers accepted as truth that unemployment is structural rather than cyclical, neither monetary nor fiscal stimulus would help. That means there would be no reason to repeal the sequester cuts, continue quantitative easing, or even discuss further spending on infrastructure and the like–curious positions for Sen. Collins given her recent statements regarding the GOP’s ‘torpedoing’ a budget deal that would have increased government spending, as well as her vote for the ARRA.
Second, businesses have a ready made excuse to suppress wages. By arguing their is a skills gap, businesses can keep hiring down, which in turn keeps wages down, make outrageous education and skills requirements of potential employees (why we have college grads in jobs that do not require a college degree), and so forth (I am stopping myself here before I stray too far, but for a fuller discussion on business promoting the skills gap argument, see here).
For whatever reason, pundits and policymakers alike have forgotten the recent economic downturn (a cyclical problem), and instead have decided to adopt theories (it’s actually a structural problem) and policies that do not address the economic and labor problems in this country.