Posted by: Dirk | September 21, 2011

Structural unemployment: US vs. Spain

The question whether the US unemployment is structural or resulting from a lack of aggregate demand is important for policy makers. While a lack of aggregate demand could trigger an increase in fiscal policy, structural causes would point towards more long-run policies regarding education and increasing flexibility as well as efficiency in the movement of production factors. Here is the definition of structural unemployment (in lack of a better source):

Joblessness caused not by lack of demand, but by changes in demand patterns or obsolescence of technology, and requiring retraining of workers and large investment in new capital equipment.

Most hints point into the direction of the lack of demand explanation, like this paper by the Roosevelt Institute:

Underemployment, or those employed working part- time for economic
reasons, has increase greatly, often more than doubling. This is
across all analyzed sectors and occupations and is negatively
correlated with capacity underutilization. The underemployed have the
skills to work the jobs they have and their incentives aren’t
distorted by unemployment insurance – they point to a story of a lack
of aggregate demand.

The BLS has some numbers online as well. Except for managers (4.9%), rates of unemployment reach from 8.4 to 11.6 percent. The average rate is 9.1%. Most people think of structural unemployment as affecting mostly those sectors with, well, structural problems. To provide a comparison, here are sectoral unemployment rates from Spain’s statistical office:

%
Agricultura 19,88%
Industria 7,88%
Construcción 18,76%
Servicios 8,72%

.

Since the US has been latino-americanized, I take it for granted that my readers understand the above table. For all others, the table shows that after the real estate boom went to bust the unemployment rate in construction is now close to 19%, the same for agriculture. Industry and services, however, have not been hit hard, with unemployment rates in these sectors standing at 7.9 and 8.7 percent respectively.

Of course, both explanations of unemployment are not exclusive. The WSJ reports on a study by researchers of the Brookings institution that implies that both may co-exist:

The difference in unemployment rates between cities with big education gaps and those with small ones is 1.7 percentage points. That’s significant, but in a country experiencing 9.1% unemployment, it will take more than closing the education gap to put the country back to work.

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