I'd like to kick off this new blog with some observations from the Clinton Global Initiative last week. This was my first time at the annual CGI meeting - so my goals were to mainly observe and understand how CGI works and what are some of the pressing topics on focus this year. At its core, the CGI is tackling problems on large scales - so it is of particular interest to me. (About two years ago, Dave Johnson wrote a bit about the evolution of the CGI that is worth reading).
On the night of Sep 20th, I got an opportunity to meet former U.S. President Bill Clinton as part of a Meeting/Q&A with some bloggers and journalists. The discussion was free-ranging and covered several topics. The topic that consumed much of the time was the US economy and American jobs. President Clinton spoke at length about his views and consistent with other contemporaneous interviews, emphasized three major areas that he believed should be our focus to rebuild the jobs market in the US: small businesses, manufacturing and clean energy. At face value, this appears to makes sense. Upon deeper inspection though, there is more to it than meets the eye. I will return to these three areas in a future post.
President Clinton also said that we must address what he felt were barriers for prospective employees to find jobs - limited mobility of a portion of the US workforce due to the fact that they are tied to homes they cannot move out of because they are financially underwater, and some level of skills mismatch (he cited a statistic in a recent employment report that he suggested was an indication that skills mismatches might have at least some role in explaining why some job openings are not getting filled). To address these two barriers, he talked about the need for the government to provide workable solutions for underwater homeowners (see Calculated Risk's charts showing stats on negative equity of US homeowners) and facilitate/enable more worker training. In some respects, Pres. Clinton's comments are consistent with observations in a recent IMF paper (by Nicoletta Batini et al.) on the US economy and jobs market. Data from 2009 suggests mobility of Americans was at a five decade low as of the year ending March 2009 due to the terrible housing market and underwater mortgages:
“In the past, people tended to move to where the jobs are,” said Assistant Treasury Secretary Alan B. Krueger, who oversees economic policy for the department. “Now it is necessary to have more of a strategy to move the jobs — and create new jobs — in areas where the people are.”
However, Mike Konczal at Rortybomb observes that:
[The IMF paper authors] find that structural unemployment is 1%-1.75%, with skills being 0.5%. That means housing hurdles run from 0.5% to 1.25% of unemployment. So that means the large majority of structural unemployment is housing related.
In my defense, we already did this test at the blog here. We ran a regression on deeply underwater homes against unemployment, similar as the IMF but with what I think is a superior instrument but felt uncomfortable including the numbers in my paper (more on that in a second).
Importantly, the IMF paper also states that "skill mismatches have been more acute in states with depressed housing markets—an interaction that is associated with even higher unemployment rates". The paper goes on to argue that the change in "structural unemployment" (as they define it) might be reversible with the right policies that increase mobility and training (I would argue that we need to act sooner rather than later though to prevent people from being out of work for years, making it much more difficult for them to re-enter the jobs market). Mike basically argues that much of this "structural unemployment" can be addressed by addressing the housing market's problems. More recently, an Economic Policy Institute (EPI) team published an analysis of whether there is a "structural unemployment" problem in the US. In "Debunking the theory of structural unemployment", EPI argues that:
Unemployment has remained at 9.5% or above for the past year and is likely to remain elevated or inch even higher through the end of 2011. The reason for this prolonged jobs crisis is fairly simple: The bursting of the housing and stock bubbles and the financial crisis lead to a severe cutback in household consumption and business investment. The policy conclusion drawn from this narrative is that we need faster growth to increase the demand for workers and reduce unemployment.
But many are promoting a different, misguided narrative, that a large share of unemployment is "structural,” meaning that there is a mismatch between unemployed workers and the jobs becoming available. Structural unemployment would result from workers having inadequate skills, or not living in the places where there are jobs. Some have postulated that employers have substantially revamped their production processes in this downturn, thereby eliminating the need for many of the types of workers who are currently unemployed. Still others suggest that the housing bubble lead to a bloated construction sector and many of those jobs will never come back, leaving many construction workers needing to seek employment in different professions for which they may not be qualified.
Why does the cause of our high unemployment rate matter? Because it will dictate the policy prescription. The policy implications of structural unemployment would be that (1) it would be foolhardy to pursue policies that increase the demand side of the equation (fiscal stimulus, either tax cuts or increased spending, or monetary policy) to lower unemployment; and (2) the appropriate policy is to offer education and training to the unemployed to help them make a transition to new occupations and sectors.
EPI’s new paper, Reasons for Skepticism About Structural Unemployment, shows that there has been little evidence to support the claim of extensive structural unemployment and that the pattern of employer behavior regarding job openings, layoffs and hires does not support such a claim.
EPI's entire piece is worth reading and make sure you also review their job seeker ratio chart showing the high ratio of unemployed workers to job openings. Mike's and EPI's concerns are reasonable since the root causes of any perceived "structural unemployment" will inevitably dictate US government policy. That said, there is no denying that even if the unemployment rate is largely demand driven and not technically "structural" or "permanent", better worker mobility and training (especially for workers who cannot move) is likely to help, not hurt, in this time. In other words, worker training should not be considered a policy prescription merely for perceived structural unemployment as EPI appears to suggest.
A final clarification - in the CGI discussion, I don't believe President Clinton ever used the term structural unemployment and he did not suggest that mobility and skillset gaps alone would lead to a permanent structural increase in unemployment in the US. Interestingly, he also indicated that CGI will start increasing its focus on US issues this year.
P.S. All use of bold text in this post is my own.