June 29, 2009
What is Driving Current Unemployment?
The unemployment data seem a straightforward bit of news, but understanding how job losses and gains figures into the news is a bit more tricky. Economics textbooks tell us that unemployment comes in three flavors: frictional, structural and cyclical.
Frictional unemployment is a natural part of an economy. Even during good times, a large share of workers change jobs voluntarily, are fired or are in companies that fail. Annual turnover of 10 percent in the most stable industries are common, and may rise to half of workers in retail firms. As a consequence something like 4½ to 6 percent of the labor force is comprised of these folks who are unemployed due to the normal frictions associated with job changes. A vibrant economy needs this type of job market.
The second type of unemployment is far more pernicious. Structural unemployment comes about when the skills of a worker become redundant. This type of unemployment most often results from some big technological shift that might render the jobs of buggy whip makers and typists unneeded. It also comes through changes in consumer tastes or productivity gains in one sector. The huge job losses in agriculture in the first half of the 20th century are a classic example. One to two percent of the labor force is unemployed at any one time because of structural unemployment.
Adding up the frictional and structural unemployment gives us roughly what economists call the non- accelerating inflation rate of unemployment or NAIRU. We used to call it the ‘natural rate’ of unemployment. That was an unfortunate moniker that served primarily to reinforce the widely held suspicion that economists are devoid of human feelings.
There was a lively debate in the early 1990s between Milton Friedman and Alan Blinder – two superb economists at different ends of the political spectrum who argue that size of the NAIRU was simply, at the time, between 5.9 and 6.1 percent. The best estimates have it ranging from 5 to 7 ½ percent over the past fifty years.
The final type of unemployment is cyclical unemployment – that which comes as part of a recession. The problem is that it is not always clear which one of these an individual falls into.
Recessions might well accelerate structural unemployment through the process of creative destruction. If all those RV jobs return to Elkhart, we might simply label the current woes as cyclical unemployment – temporary and related to the recession. If they do not, we might conclude that the expectations of higher gas prices substantially wounded the RV industry making these permanent job losses, of the structural type. The same recession might dampen frictional job losses as workers tend to play the labor market more conservatively.
Frictional unemployment is a necessary part of a healthy economy, while cyclical job losses, no matter how painful are temporary. Structural job losses are the most painful both to individuals and to communities. These are the ones that leave workers with outdated skills and communities with large job losses.
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