JACKSON HOLE, WYO. – So many people have been out of work for so long. The nation is having such difficulty bringing down unemployment.
Something fundamental must be wrong, right?
This is one of the big questions economists and top economic policymakers tried to answer as they gathered here over the past few days for a symposium hosted by the Federal Reserve Bank of Kansas City.
One popular theory for why joblessness has stayed so high — currently at 8.3 percent, with a large portion of people unemployed for more than six months — is a rising amount of what economists call structural unemployment.
That’s the belief that a large number of the people looking for jobs are struggling not because there are not enough jobs available, but rather because they’re the wrong age or don’t have the right education or skills.
Some argue that if these fundamental factors are behind the nation’s weak labor market, there’s little that government can do, at least in the short term, to boost employment. The thinking is that even if a company has enough business, it won’t hire a new worker who’s the wrong age or doesn’t have the appropriate skills.
But a new paper by Edward Lazear, a Stanford professor and former top economic adviser to George W. Bush, and James Spletzer, a top economist at the Census Bureau, concludes that structural unemployment isn’t a problem.
The authors looked at employment levels across industries, age groups, levels of education achievement and other indicators. And in all cases, they found that just as employment declined during the recession, it bounced back with vigor afterward.
They argue that there is “no compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the pattern of persistently high unemployment rates.”
Had there been significant structural problems, some categories of workers (by sector, age or other classification) probably would not have seen a significant rebound.
Lazear and Spletzer assert that the unemployment problem is cyclical. If that’s the case, the economy will continue to recover, and unemployment across categories will continue to decline, albeit at a slow rate because of how bad things got in the midst of the recession.
If not structural unemployment, then what else explains the nation’s slow recovery?
One explanation advanced by a number of economists here is that policymakers have repeatedly failed to address the root problem behind the economy’s struggles: an overhang of household mortgage debt.
Several years after the end of the recession, more than 10 million people still owe more on their homes than their properties are worth. A number of studies have shown that carrying a high debt leads consumers to spend less and save more, depriving the economy of its traditional engine of growth.
The federal response to the financial crisis was to bail out banks, and the Obama administration later put in place a program to try to avert foreclosures.
But none of the policies addressed the nearly $700 billion of excessive mortgage debt in the economy. It’s for that reason that some economists say the economy has had difficulty in picking up speed.
“The policy bias has been toward supporting financial institutions as opposed to targeting what I think is the central problem. And that is the household debt problem,” Amir Sufi, an economist at the University of Chicago who has done groundbreaking research on the role of debt in the economy, said during the conference discussions.
Alan Blinder, the Princeton professor and former Federal Reserve vice chairman, said of the country’s response to the housing crisis, “It’s a national shame we haven’t done better.”
Going forward, some economists at the conference argue that beyond further aid to indebted homeowners, federal officials could do more to generate economic activity.
Michael Woodford, a Columbia University professor, argued that the Federal Reserve should look beyond its normal tools of lowering interest rates and buying Treasury and mortgage bonds to stimulate growth.
These interventions can be too distant from the real needs of consumers and businesses, he said. So, for instance, he encouraged the Fed to consider more direct plans to subsidize lending to consumers and small businesses — reaching directly into the real economy.