A "New Normal" Unemployment Rate?

Though the Great Recession officially ended in June of 2009, unemployment has remained stubbornly high. This has led some economic observers to argue that structural unemployment - or a situation where workers skills or geographic locations don't match with employer's desire - has increased. This differs from cyclical unemployment, which is associated with fluctuations in demand related to changes or swings in the business cycle. A new report from the Center for Economic and Policy Research (CEPR) finds little support for wither argument for and increased rate of structural unemployment.

"We are not in a national employment crisis because the available workforce is not well-matched with the available jobs. We are in a crisis because the economy is not producing enough jobs," said John Schmitt, a senior economist at CEPR and a co-author of the paper.

The report, "Deconstructing Structural Unemployment," uses data from the Census Bureau's January 2010 Displaced Workers Survey (DWS) to critique two of the main arguments for structural unemployment. The DWS studies the experience of people 20 and over who are out of work because their plant or company moved or closed, or their position or shift was abolished, or their employers faced a fall-off in demand. Based on the data, the authors find scant evidence to support the claim that there is a high "new normal" unemployment rate.

Those arguing in favor of a new higher rate of unemployment often bring up the large increase in unemployment among construction workers. As the authors of the report demonstrate, though, the experience of construction workers is remarkably similar to the workers displaced from other sectors. For instance, the paper shows that slightly more construction workers than non-construction workers found a new job between the time they were displaced and when they were interviewed for the survey.

The second argument suggesting higher structural unemployment is that "house lock"--an inability to move due to falling house prices -- has left the jobless in high unemployment areas. While the authors found that house prices do have some impact on a workers' likelihood to move, the overall effect was quite small. To put this in perspective, if the unemployment rate was 10 percent, "house-lock" would only raise the unemployment rate to about 10.2 percent.

Neither of these arguments makes a substantive case for higher structural unemployment. Policy makers would do well to consider that the cyclical nature of current unemployment rates underscores the role that expansionary monetary policy can play in safely and substantially lowering the unemployment rate with little or no risk of inflation.