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Lazear on Unemployment

Article by Matthew Denhart September 4, 2012 //   3 minute read

In the aftermath of the 2007-08 financial crisis, it was no surprise to see a high rate of unemployment. What is alarming, however, is the persistence of high unemployment, which remains above 8%. This has led many to declare that the U.S. faces a “structural unemployment” problem, meaning that our economy faces a more complex unemployment problem than simple economic weakness. Even in better economic times, the argument goes, 5% unemployment would be considered a normal unemployment rate. Edward P. Lazear of Stanford University — and a Bush Institute adviser — offers a strong rebuttal to this view, penning an Op-Ed for the Wall Street Journal appropriately titled “There Is No ‘Structural Unemployment Problem.” Lazear writes that “In 2007, the unemployment rate was 4.4%. Two years later, it reached 10%. The structure of a modern economy does not change that quickly.” A key component of the “structural unemployment” argument is the view that our economy is hampered by a mismatch between available jobs and the skills of available workers. More specifically, many jobs are available in industries like health care, but unemployed workers from industries like construction, manufacturing, and retailing do not have the necessary skills and training to fill them. This mismatch is seen as a “structural” problem, one that won’t go away soon. Lazear concedes that some mismatch does exist. However, today’s high unemployment rate is not the result of mismatch. Lazear presents data showing that a majority of the spike in unemployment was indeed in the construction, manufacturing, and retail industries. However, since unemployment peaked in October 2009, a majority of the job recoveries have been in these same three industries. Furthermore, Lazear notes,

Whatever mismatch exists today was also present when the labor market was booming. Turning construction workers into nurses might help a little, because some of the shortages in health and other industries are a long-run problem. But high unemployment today is not a result of the job openings being where the appropriately skilled workers are unavailable.

The real cause of the country’s stubbornly high unemployment rate is its lack of economic growth. “An empirical rule of thumb is that each percentage point of growth contributes about one-half a percentage point to employment,” Lazear writes. Thus, the unemployment rate is right around where one would expect given weak growth the last several years. The path forward is clear, our full focus should be on growing the economy. With 4% annual growth, debates about “structural” unemployment, and indeed unemployment itself, would be unnecessary.