Krugman- Defining Structural Unemployment

[n2doc]

Here’s what economists mean by “a rise in structural unemployment”: a rise in the minimum unemployment rate you can get to before you start having inflation problems.

There’s a story behind why that might happen — it might happen because unemployed workers have the wrong skills, or they’re in the wrong places, or they can live so well off the dole that they don’t really want to work, or whatever. But the measure of structural unemployment is that worsening of the inflation-unemployment tradeoff. So, for example, the demonstration that Britain suffered a large rise in structural unemployment in the late 70s through the 80s was the way inflation took off in the late 80s, even though the unemployment rate was quite high by historical standards.

Once you realize that’s what it’s about, you see that many of the things people say show a rise in structural unemployment don’t really bear on the issue. You say we had a big bubble in the past? OK, but that doesn’t explain why trying to raise employment now would cause inflation. You say that we’ve been living beyond our means? OK, but again, why does that limit the number of workers we can employ making stuff for somebody?

So where’s the evidence of a structural rise in unemployment in America? Wage growth is slowing; core inflation is falling; clearly, we’re not hitting an inflationary wall right now. Maybe the wall is closer than it seems — but then you look for evidence of skills in short supply, regions without enough workers, and so on, and it isn’t there.

As far as I can tell, the only economists who believe that we’re suffering largely from a rise in structural unemployment are those who are ideologically committed to the view that the demand side of the economy doesn’t matter — and so by definition, in their universe, any large rise in unemployment must be structural.

But you have to ask, why do these people have a voice in the Obama administration?

http://krugman.blogs.nytimes.com/2010/11/29/defining-structural-unemployment/

[xchrom]

1. Because the folks that hired them into the admin

Believe that too?