Wednesday, December 1, 2010

Paul Krugman on Structural Unemployment

I tend to disagree is Krugman on structural unemployment. He views the current increase in unemployment as entirely cyclical (in his mind the economy has a natural rate around 5%), while I view the increase in unemployment as increases in structural and cyclical (in my mind the economy has a natural unemployment rate around 6.5-7%). Krugman goes on to say:
As far as I can tell, the only economists who believe that we’re suffering largely from a rise in structural unemployment are those who are ideologically committed to the view that the demand side of the economy doesn’t matter — and so by definition, in their universe, any large rise in unemployment must be structural.
Well, I believe the demand side does matter and we have an increase in structural unemployment. The difference between Krugman and myself is where we see potential output, mainly during the housing boom. Krugman's argument implicitly assumes the economy was operating at potential output during the housing boom. I believe the economy was operating slightly above potential during the same time period. In other word, the 5% unemployment in the economy was because cyclical unemployment was negative. If you go back to 2000, you'll see large decreases in the manufacturing employment. This is the exact definition of structural unemployment.  These workers do not have the skills needed to find employment in the current economy. During the housing bubble, the construction industry was clearly operating above it's potential) took on the unemployed manufacturing workers. Today employment in the construction industry has returned to pre-bubble levels, and we're left with 8 million unemployed manufacturing workers.

1 comment:

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