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Reasons for Skepticism about Structural Unemployment Examining the Demand-Side Evidence

By Lawrence Mishel, Heidi Shierholz and Kathryn Edwards

Abstract

Unemployment has remained at 9.5 % 1 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. 2 This would be, for instance, because their skills are inadequate, have deteriorated, or are not applicable to the industries that are expanding, or tha

Year: 2010
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