The "Sober Look" Blog Breaks Unemployment into Structural and Non-Structural Components

And Reinforces Both Keynesian Economic Policy and the Need For Greater Government Involvement in the Economy

A concern by everyone concerned with economic policy and the economic well being of the country is why the unemployment rate has not responded better to the substantial fiscal stimulus brought about by large federal deficits.  Of course one answer is that in part the federal stimulus actions are being offset by state government contractionary policy.  This results in one level of government essentially fighting against the policy of the other level of government; the federal government is stimulating employment and state and local governments are firing people.

The Forum Sober Look has another explanation of the perplexingly high level of unemployment.  It breaks unemployment into non-structural component and the structural component.  The non-structural component of unemployment is the result of lack of aggregate demand and their analysis shows that this part of the unemployment problem has indeed responded to fiscal policy.

The Forum presents graphs that show

job growth of the non-impaired sectors has almost returned to the pre-crisis levels.

So what is the structural component and how has it behaved?

Credit Suisse defines structurally impaired sectors to "include real estate related industries, finance, manufacturing, and the state and local government sector." These are the sectors that at least in part rode the "bubble" economy wave. Many of these jobs were credit dependent, with growth beyond what the economy could sustain naturally.

And the conclusion from the data is that this is where employment has not rebounded.





The structurally impaired sector jobs created during the period of over-capacity growth simply never returned.  The sectors were highly credit dependent and with all the deleveraging taking place, the jobs are not likely to come back any time soon (thus the definition: "structurally impaired")

Critics of Keynesian economics and fiscal policy will claim that this means Keynesian economics and fiscal policy is wrong.  That position is wrong.  It does mean that tax cuts will not stimulate the elimination of structurally impaired employment.  But it also menas that fiscal policy resulting from active government spending to reduce the structural unemployment will be effective.

This means training and education, it means tax credits for companies that re-train employees, it means government help in the housing market to allow workers to relocate to where jobs and opportunities are.  In short it means specifically targeted government spending to address the problem.

This also explains why the Obama administration’s stimulus program has been far less effective than it could have been.  Because of political problems, it had to rely far too much on tax cuts, which of course somewhat fixed the aggregate demand problem.  But they did nothing to fix the structural unemployment problem, and hence that problem remains.  Why exactly this is a mystery is unclear.

Note:  Thanks for the reference go to Tyler Cowens