Is Your Unemployment Cyclical or Structural?

As the Great Recession trudges steadily along, the economic question du jour seems to be whether America's cyclical unemployment problem is morphing into a structural unemployment problem.

Boiled down to their essences, the former is the short-term spike in unemployment which comes with a bust in the business cycle. Meanwhile the latter is the long-term unemployment rate caused by frictions between the types of labor supplied and demanded in an economy. As it might be imagined, economists view a high structural rate to be worse than a high cyclical rate; cycles, by nature, are not permanent while a structural rate is about as permanent as economic concepts get, at least in the medium term.

I think we can all agree that having a large percentage of the population staying at home being unproductive over the long-term is not a good thing for an economy. Additionally, if workers' skills don't match up well with the demands of the economy they work in, there are obvious negative implications for their employability. This situation typically leads to a necessity for worker retraining, which is an economic cost on individuals and society.

However, economists often paint the picture that structural unemployment issues are also worse than cyclical issues for reasons of worker psychology. In other words, if unemployed workers understand that their plights are due to a 'blip' in the economy rather than a deeper issue in the economic structure of their job market, that they don't take it so badly. While I don't do so often, this is one example of the economic orthodoxy that I just have to disagree with.

I have had the unfortunate ability to observe many unemployed individuals over the past few years. I have had conversations with them, I have interviewed them, I have even had the opportunity to observe their demeanours. What I can report, if only anecdotally, is that the attitudes of unemployed workers are much more linked to their own period of unemployment and prospects than any kind of notion of whether their plights are due to longer or more short-term economic factors.

Of course, some clever economist out there might point out that it is far more likely that the conditions for long-term unemployment among individuals would exist when structural unemployment is the main problem. To that I would answer that most people (highlighted by the fact that many economists don't agree on the exact fault line between the two) don't have any clue whether their unemployment is cyclical or structural. Unlike many areas of economics where unwitting participants are not a detriment, where we can use very simple models to predict one among a small number of potential outcomes, unemployment is a much more psychological affair.

Supply and demand just can't capture the feelings that individuals have when they are not working. While very long-term unemployment may lead to more disheartened workers, it is nonetheless simplistic to assume that people feel worse when their unemployment is due to structural factors. Unemployment and the issues it causes are much more personal than that. Perhaps due to the fact that they are often employed (at a perplexingly high rate in the opinions of some) the types of economists who write texts and feature in large papers don't understand this.

In sum, the answer to the question in the title is that it doesn't matter. What to do about this? I am not sure that there is a policy answer to this question except make sure an economy is on track and providing employment opportunities for those who seek them. If I had a ready-made idea for how to do that, I would probably be spending my time doing far more important things than blogging. In the meantime an easier, though relatively inconsequential way to address the question might be to refresh an old adage. Unemployment is when you lose your job; structural unemployment is when you lost your job a long time ago...

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