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Wednesday, January 12, 2011

Mailbag: "Bear Trader" Reviews the Unemployment numbers:

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, who will vote on the interest- rate setting Federal Open Market Committee this year, has said (I can't remember where I read this) that he thinks that "structural" unemployment is about 6% to 8% at this time and will be for the unforeseeable future. When we add in frictional unemployment of 3% we get the unemployment rates we see now. If he is correct then the unemployment we have now will continue for a period of years or decades, who knows? Could be better, could be worse.

Kocherlakota is talking about U-3 unemployment here, that is, presently 9.4% (Apparently 500,000 people dropped out of the job market last month.!!??) I prefer the same technique for measuring unemployment as was used during the Great Depression, though, guess what, unemployment using that metric is worse now than then. Heh.

Discussion of structural unemployment from Wikipedia, which is OK:

http://en.wikipedia.org/wiki/Structural_unemployment

Structural unemployment is a form of unemployment resulting from a mismatch between demand in the labor market and the skills and locations of the workers seeking employment. Even though the number of vacancies may be equal to, or greater than, the number of the unemployed, the unemployed workers may lack the skills needed for the jobs; or they may not live in the part of the country or world where the jobs are available.

Structural unemployment is a result of the dynamics of the labor market and the fact that these can never be as flexible as, e.g., financial markets. Workers are "left behind" due to costs of training and moving (e.g., the cost of selling one's house in a depressed local economy), plus inefficiencies in the labor markets, such as discrimination or monopoly power.

Structural unemployment is hard to separate empirically from frictional unemployment, except to say that it lasts longer. As with frictional unemployment, simple demand-side stimulus will not work to easily abolish this type of unemployment.

Structural unemployment may also be encouraged to rise by persistent cyclical unemployment: if an economy suffers from long-lasting low aggregate demand, it means that many of the unemployed become disheartened, while their skills (including job-searching skills) become "rusty" and obsolete. Problems with debt may lead to homelessness and a fall into the vicious circle of poverty. This means that they may not fit the job vacancies that are created when the economy recovers.

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The fellow doesn't mention the fellow with thirty or forty years of job experience whose industry just ain't comin' back. The new jobs don't just require retraining, they require a whole different sort of person, smart, willing, capable - and young. Older folks want their experience to count for something. When it doesn't then they join the line to apply for a Wal-Mart greeter job.

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