Is High Unemployment Recession-Proof?

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High Unemployment The direct correlation between unemployment and the great recession may be less than meets the eye, or is commonly perceived, so says a new report.

The cause of the near-doubling of national employment in the wake of the financial crisis (from 5.8 percent at the end of 2008 to 9.6 percent at the end of 2010) may in fact have roughly as much to do with structural factors as it does with cyclical factors, argues a new working paper put out by the International Monetary Fund. The paper, entitled, "New Evidence on Cyclical and Structural Sources of Unemployment," was put together by IMF economists Jinzhu Chen, Prakash Kannan, Prakash Loungani and Bharat Trehan.

"For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession," the paper puts it plainly in the introduction. Much of the paper is devoted to explaining why a final end to the recession -- a cyclical change -- might not necessarily lead to a quick uptick in employment.

The thinking is centered on the structural problem of the American workforce's "mismatch" with the skills in demand. As the authors of the study put it, the proof is in the "considerable heterogeneity in unemployment outcomes" by sector, with the construction industry and its 16 percent long-term unemployment rate used as an example. The distinction between the categories is not simplistic, and the authors do note, "the severity and persistence of output declines during the Great Recession are clearly the dominant factor in pushing up U.S. unemployment.

And while the above argument is not entirely new, what is fresh is the extent to which structural unemployment is at play in the nation's labor woes. The paper's findings suggest that structural unemployment is at or around 8 percent, higher than the previously accepted rate of 6 percent for the prior few decades. The figure not only spells trouble for America's struggling workforce, but also presents a potential argument against further stimulus: Throwing water on an eternal flame won't do much. (Such a conclusion is complicated in the event funds are used for retraining purposes, as opposed to rejuvenating existing, but struggling, sectors and their workers, as was pointed out on a post on Time Magazine's Curious Capitalist blog written by Stephen Gandel.)

The paper's findings go against a school of thought vociferously defended by economist Paul Krugman, which says the problems have everything to do with hiring policies and the swings of the market.

"All the facts suggest that high unemployment in America is the result of inadequate demand -- full stop," Krugman is cited as saying in the paper.

The IMF paper is sure to reignite the debate over how best to help get Americans back to work, which should be expected to dominate the agenda in the next presidential election.


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