September 30, 2010

Structural and Cyclical Unemployment

Nobel Prize winning economist, Paul Krugman recently reiterated that the U.S. has serious structural problems, and that the current level of unemployment is not structural but rather the result of a major recession.

While normally, Krugman has me nodding in agreement, I do not believe that all of the jobs lost during the Great Recession are temporary job losses.  I liken the jobs crisis, as he puts it, to a shelf:

You have a shelf (U.S. economy) that is generally strong and has been working properly for year.  You recently put a heavy TV (recession) on it, and it cracks.  Obviously, the first thing to do is to remove the heavy TV (provide stimulus).  However, the shelf is still cracked and needs repair (structural improvement to the economy).

With global competition rising, the U.S. economy must evolve and differentiate itself.  Many of the manufacturing jobs lost in the auto industry will not return, as the U.S. consumer demands more efficient cars.  Residential housing construction will not return to its 2002-2006 levels leading up to the housing bust.  The impact of the recently passed financial regulation on the banking industry is still unclear.

These are not temporary changes to these industries.  The 'new normal,' as it is described, includes a more cautious American consumer, much tighter credit conditions and consolidation within industry.  This forces corporations to be leaner while dramatically slowing growth of small businesses; all of which creates slack in the labor market.

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