Illustration by Mark Beauchamp
You may recall that there has been some debate concerning the nature of unemployment. One group proposes that the current intractability of unemployment is caused by structural problems in the labor market. Businesses would hire more people, but they are running into barriers in hiring. As Narayana Kocherlakota, the President of the Federal Reserve Bank of Minneapolis, put it:
Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs. There are many possible sources of mismatch—geography, skills, demography—and they are probably all at work. Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.
On the other side of the argument, you have a group that assigns the blame for stubborn unemployment to a lack of demand in the market. There is not as high a demand for goods and services, and so businesses are not hiring more people to meet the demand. Paul Krugman boiled it down this way:
…all the facts suggest that high unemployment in America is the result of inadequate demand — full stop. Saying that there are no easy answers sounds wise, but it’s actually foolish: Our unemployment crisis could be cured very quickly if we had the intellectual clarity and political will to act.
For those taking the tack that unemployment was structural, the government and the Federal Reserve could do little to help — further monetary action or stimulus spending would not be effective. For cyclical theorists, it was the exact opposite — immediate government spending aimed at jump-starting demand was all that was required.
Cooler heads took a more reasonable tack, and asked why it couldn’t be both. Annie Lowrey:
…the problem seems to me to be both: The unemployment is cyclical and structural. Most sectors have suffered from the turndown, but job losses are concentrated in some industries…
I don’t think this debate can be answered by moving close to the polar extremes and declaring it’s mainly a structural or cyclical problem. For me, it seems obvious that part of the problem is structural. The real question is how large the structural component is and what can be done about it. But no matter how large it is — take a very liberal estimate of the size — I don’t think there’s any way to deny that there is a substantial cyclical component on top of it that demands government action.
Why come back to this topic? The nature of unemployment is crucial in the forthcoming decision about WIA training funding. As Kocherlakota pointed out above, “…the Fed(eral Reserve) does not have a means to transform construction workers into manufacturing workers.” In other words, the Fed (in it’s capacity as a bank) can’t retrain people. Schools, and their partners in workforce development, do that.
If unemployment is structural (or has some structural components), then retraining efforts should be a priority for the federal government. If unemployment is cyclical, then retraining is not a priority. The economy just needs to be kick-started, likely by America doing what America has done — work hard, make good stuff, be innovative.