A recent New York Times article on job conditions began by stating the obvious: ‘Many of the jobs lost during the recession are not coming back.’
The national unemployment rate began to rise from a low of 4.4 percent in May 2007, doubling in two years and hitting 10.1 percent last November. At 9.9 percent in April, it remains very high for a time in which many proclaim the recession to be over simply because the value of all goods and services produced is no longer falling.
But the extent and duration of current unemployment is the worst in 30 years and nearly the worst since the Great Depression. It is complex. Not all unemployed people are without a job for the same reasons, and different people face very different prospects for going back to work. Those who argue that some jobs that have disappeared will never reappear are correct, although the number of such positions is debatable.
What is mentioned less often is that eventually there will be new jobs, although the number, type and other details about such future jobs are unknown.
To tease this all apart, it is helpful to review a topic from basic econ. Anyone who takes an introductory macroeconomics course learns there are three general categories of unemployment: frictional, cyclical and structural.
Frictional unemployment refers to people who are temporarily between jobs. Someone followed a partner from one city to another and is looking for a job. That person can expect to get one soon, but until then, he or she counts among the unemployed. Or someone who stayed home for a year after the birth of a child returns to the work force. While they seek jobs, but before they get one, they are frictionally unemployed. So are recent college graduates who had not held down full- or part-time jobs while in school but now seek one.
Frictional unemployment imposes the least pain on society and tends to be shortest in term. It comprises most of the unemployed when the unemployment rate is much below 5 percent.
Cyclical unemployment results from the periodic fluctuations in output and employment that we call the business cycle. The economy grows strongly, and businesses hire more workers. It slows, and they lay some off. This is an age-old process. Such employment fluctuations can be mild and short-term, as in the 1991 recession, or they can be severe and persistent as in the 1930s, in the early 1980s or now. Most of the increase in unemployed since 2007 is of this type.
The third type of unemployment is termed structural. This occurs when a change in technology or some other long-term factor changes the underlying structure of the economy. In the 1920s or 1940s, there were more than 40,000 iron miners in Minnesota. In the 1970s, there still were nearly 20,000. Now, there are less that 4,000, even though ore output has not dropped. That is structural change.
So was the drop in steam locomotive mechanics when less maintenance-intensive diesel locomotives took over in the 1940s or the declines in buggy and stagecoach manufacturing employment a century ago.
Structural unemployment often involves long periods of being out of work simply because the skills a worker may have used for decades are no longer of value to any employer. Moreover, many are in their 50s or older and may not be as adept as younger people at picking up new skills. Some may encounter age discrimination, and others are loath to take a job paying less than the previous one.
These neat categories of frictional, cyclical and structural unemployment are not neatly independent, however. When the economy is in the doldrums, a graduating student or a parent returning to the labor force may spend weeks or months getting a job rather than the few days that might be needed when the economy is hot.
Moreover, structural unemployment always gets a boost when the economy slows. This happens because there are always some firms that are living on borrowed time because of structural change in the economy. But they often have factories or equipment that is paid for and fully depreciated. Since the entire sector is dying, there are no potential buyers for specialized machinery or equipment.
But as long as sales are high enough to cover variable operating costs such as wages, the company may keep coasting along. When a recession occurs, however, revenues fall below the shutdown point, where even variable costs are no longer covered, and things come to a sudden halt.
That was the case with the traditional U.S. steel industry in the 1980s. Many mills in Pennsylvania and Ohio had 1920s technology. Labor costs were high, in part due to intransigent unions and shortsighted managers. But the physical facilities were paid for, and as long as the selling price of steel covered labor, ore, fuel and other variable inputs, the mills stayed open.
The recession brought on by the Volcker-led Fed’s effort to stem inflation combined with the strong dollar dealt a quick coup-de-grace to an already moribund industry. Many tens of thousands lost jobs in a matter of a couple of years. Those particular steel jobs have not come back.
Many of those workers were doomed to be structurally unemployed at some time in the future anyway. But a harsh recession made it happen all at once. Similar things are going on right now.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.