Report | Jobs and Unemployment

Reasons for Skepticism About Structural Unemployment

Briefing Paper #279

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Unemployment has remained at 9.5% or above for more than a year, and may remain that high or inch even higher through the end of 2011. The predominant, and in our view correct, narrative to describe this situation has been that the bursting of the housing bubble and the resulting loss of wealth led to sharp cutbacks in consumer spending. The loss of consumers, along with financial market chaos brought on by the bubble’s burst, also led to a collapse in business investment. As consumer spending and business investment dried up, severe job loss followed.

Further, even after economic output stopped contracting (in roughly the middle of 2009), its subsequent growth has not been nearly rapid enough to create the jobs needed to even keep pace with normal population growth, let alone to put the backlog of workers who lost their jobs during the collapse back to work.

Our view that this is the correct explanation for the jobs crisis is rooted in data—the observed collapse of overall output, reductions in consumption, and extensive excess capacity. The policy conclusion drawn from this narrative is that we need faster growth to increase the demand for workers and reduce unemployment.

Yet, there has been increased attention to a competing narrative, the possibility that a large share of current high unemployment is “structural,” meaning that the problem is that those who are unemployed are not well-suited to the jobs becoming available. This would be, for instance, because their skills are inadequate, have deteriorated, or are not applicable to the industries that are expanding, or that the unemployed simply do not live in the places where the jobs are. Some make claims about structural unemployment because certain aggregate relationships, such as between job openings and unemployment, do not appear to be following historical patterns, suggesting a possible skill mismatch. Others have postulated that employers have substantially revamped their production processes in this downturn, thereby eliminating the need for many of the types of workers who are currently unemployed.  Still others note that the housing bubble lead to a bloated construction sector and many of those jobs will never come back, leaving many workers needing to switch to new jobs for which they may not be qualified.

Of course, it matters whether the claim is that structural unemployment is a large or small share of unemployment at this stage of the business cycle. Unless our current unemployment problem is primarily structural, policies to alleviate cyclical unemployment are still appropriate.

Thus, this paper addresses and questions the claim that structural unemployment is the predominant reason that unemployment is high. There has been little evidence offered to support the claim of extensive structural unemployment, and we find that the pattern of employer behavior regarding job openings, layoffs, and hires does not support such a claim. This matters quite a bit for guiding policy. The policy implications of a finding that our high unemployment is primarily structural are that: (1) it would be foolhardy to use further demand management (fiscal stimulus, either tax cuts or increased spending, or monetary policy) to lower unemployment; and, (2) the appropriate policy is to offer education and training to the unemployed to help them make a transition to new occupations and sectors.