Wednesday, August 18, 2010

Catalan on Structural Unemployment

Jonathan Catalan has a new piece up on the emergence of structural unemployment, a topic that has been a concern for a lot of people with the spike in unemployment duration.

I haven't gotten to read it yet, but this caught my attention:

"The Keynesian solution, as usual, is to stimulate aggregate demand. Specifically, it is held that the timeliest solution is expansive fiscal and monetary policy."

I think we need to be careful about this. What I think Keynesians are saying is that demand stimulus is necessary to make sure that cyclical unemployment doesn't become structural. But traditional fiscal and monetary policy isn't all that common a policy to address structural unemployment itself. For that you usually hear people addressing hiring and firing policies, the tax burden, hiring subsidies, training, the structure of unemployment compensation, and occasionally you'll hear people mention things like direct employment for the long-term unemployed. So I just think it's important to keep in mind that when people talk about stimulus in the same breath that they talk about structural unemployment now, I think for the most part they're addressing how to keep cyclical unemployment from becoming structural - not how to address structural unemployment itself.

I haven't personally thought about these issues for a while, but I did write a paper on policies to address long-term unemployment in grad school (which is closely related to structural unemployment problems). A lot of my thinking on this stuff (at least on the policy side) has been shaped by guys like, Layard, Nickell, and Jackson. This is an excellent book on it.

I might comment with more thoughts when I get a chance to read the paper.


  1. Jonathan assumes that heightened unemployment is primarily (or entirely) a consequence of structural misallocations. Therefore, unemployed labour must be redeployed to alternative ends, because its previous employment was unsustainable. Such a process will be lengthy and costly, because specialised labour cannot be repurposed easily.

    Although I have sympathy with this position, I do not believe most Keynesians do. Some acknowledge that unemployment may be partly structural, but tend to stress temporary, non-structural unemployment caused by tight monetary policy (or deficient aggregate demand).

    Jonathan easily makes his opponents appear fools by implicitly suggesting that, despite the structural character of unemployment, dimwits like Brad DeLong and Mark Thoma persist in calling for fiscal and monetary stimuli. Whether this is his intent or not, it is an impression I took from the article.

    I believe Jonathan is quite unfair to his opponents, who, I believe, would advise quite different policies if they agreed with his diagnosis of oru current problems. Perhaps I am mistaken in my assessment of such Keynesians, but in any case, I expect more from Jonathan.

  2. Well, my main intent in the article was not a criticism of Keynesian solutions, but rather a criticism of the notion that cyclical unemployment could turn into permanent structural unemployment.

    But, I may not have been clear. It seems as if the point was lost amongst non-Austrians and Austrians alike (see the blog comments by PM Lawrence... although I have a feeling that his comments are just attempts to outsmart me, although this just may be my pride talking).

  3. By the way, based on that article alone, if monetary stimulus and fiscal policy could sustainably increase private investment then I would see it is as a viable solution.

    My main argument is that the problem isn't structural, as much as it has to do with productivity.

  4. "Although I have sympathy with this position, I do not believe most Keynesians do."

    I think we've had a very skewed view of economics given the circumstances of the stimulus debate. When Keynesians have their Keynesian had on or even simply their macro had on, these issues don't come to the fore that much. But in matching models and in a lot of discussion of labor contracts, etc. - there is considerable discussion of these issues. It's not an "Austrian" position (at least in the broader terms in which you've put it), and it's not part of the "Keynesian" story as a macroeconomic story, but it is something that a lot of Keynesians are just fine with. And ultimately it's rarely something they actually oppose - usually at most its just not discussed.

  5. Daniel,

    I do not mean that Keynesians have no comprehension of capital and labour specificity, or misallocation concerns following the housing bubble. Rather, it seems most consider these matters trifling compared to inadequate aggregate demand. In other words, Keynesians do not believe malinvestment is the major explanatory factor of why the recession has been so bad (though they sometimes cite it to help explain how the recession got started in the first place).

    If this is not the case, then they're bonkers, in my humble opinion.

  6. I think Keynesians certainly think, as you say, that misallocation of capital to housing caused the crisis and they also think that the fact that capital misallocation gave us a "balance sheet recession" made the recession considerably worse than it is, don't you?

    I was thinking more in terms of labor because that's what Jonathan's article was about. In the case of the misallocation of labor, that's something that Keynesians haven't talked a lot about recently - but people have to realize that labor specificity and appropriate job matching is a really important part of "mainstream" theory, which I think is lost on a lot of Austrians.

    Now, when I hear "malinvestments" I think of misallocation of capital due to an unsustainable change in the time structure of production. I don't simply think of "asset bubble" when I hear "malinvestment".

    So labor and capital specificity? Yes - Keynesians certainly have that.

    Malinvestments? No, not really, although I personally think it could be smoothly integrated.

    I'm wondering if we're getting confused here because you and I are treating the relationship between specificity and malinvestment differently.


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