structural unemployment vs cyclical unemployment

Brad Delong:

Over at Slate, James Ledbetter says that he cannot referee between the two gangs of economists warring over the causes of high unemployment.

But he is wrong.

He can.

Here is how:

Suppose that you have not cyclical unemployment generated by a collapse in aggregate demand but structural unemployment generated by mismatch, suppose you have a situation in which the structure of demand by consumers is different from the jobs that workers are capable of filling. Suppose--this is Berkeley, after all--that we were in a nice equilibrium in which some workers were baristas making lattes and other workers were yoga instructors teaching classes and that all of a sudden we have had a big shift in demand: that consumers decide that they want few moments of wired, frenetic caffeination and more moments of inner peace.

What would we expect to find happening?

We would expect, first, coffee bars to stand empty as people hoarded their quarters for the next yoga lesson. We would expect coffee bars to fire baristas, and to close down. But we would also expect yoga studios to be crowded, and yoga instructors to be teaching extra classes, and working long hours, and raising their prices, and training ex-baristas to chant properly, do the downward-facing dog and the lizard, and teach others how to achieve inner peace.

The size and duration of the excess unemployment of ex-baristas might be substantial and long-lasting. It takes quite a while to retrain a barista as a yoga instructor. Those seeking training might have a difficult time getting the attention of and apprenticing themselves to the yoga instructors doing land-office business--given how mercenary and grasping and eager to catch the wave of the market we all know yoga instructors to be.

But depression in the coffee-bar sector and unemployment among ex-baristas would be balanced by exuberance in the yoga-studio sector, rising prices for yoga lessons, and long hours and high wages for yoga instructors.

That is what 'mismatch' structura unemployment looks like--one sector depressed with a lot of idle excess labor, a second sector booming with rising wages and prices.

Minneapolis Federal Reserve chair Kocherlakota seemed to believe that our unemployment is structural which would not be affected by Fed policy:

...it is hard to see how the Fed can do much to cure this problem [of unemployment] ...the Fed does not have a means to transform construction workers into manufacturing workers.

As Krugman noted:

...Kocherlakota would have us believe that there’s a big problem of mismatch because manufacturing is trying to hire, while construction has slumped. But here’s the employment reality:

Bureau of Labor Statistics

Manufacturing employment has slumped, not risen — in fact, it has fallen more than construction employment. The problem is lack of overall demand, not worker mismatch.