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Think tank: Unemployment report of 7.8 percent proves U.S. needs more spending

Today’s news from the Labor Department that the unemployment rate fell to 7.8 percent in September is stirring a debate over how to turn that into a continuous trend. The creation of 114,000 jobs in September has resulted in the lowest unemployment rate since January 2009.

For Dean Baker of the Center for Policy and Economic Research, today’s jobs report proves his point even more: U.S. unemployment is not a structural problem — the result of a jobs or skills mismatch. It’s a demand problem and the best way to create more demand is through spending.

This isn’t an argument made just by those on the left. Last month, Edward Lazear, former chairman of the president’s Council of Economic Advisers under the Bush administration, also argued emphatically that the U.S. is not facing a structural unemployment problem.

In a Wall Street Journal article (“There Is No ‘Structural’ Unemployment Problem“), Lazear wrote:

The evidence suggests that to reduce unemployment, all we need to do is grow the economy. Unfortunately, current policies aren’t doing that. The problems in the economy are not structural and this is not a jobless recovery. A more accurate view is that it is not a recovery at all.

Baker and Lazear might not firmly agree on how to grow the economy, but according to Baker’s policy brief, “The obvious policies to promote spending are through larger government deficits, either by direct spending or tax cuts, Federal Reserve Board actions that lower interest rates, and reducing the value of the dollar which will increase the country’s net exports.”

Today’s drop in unemployment numbers with a robust boost in jobs further proves that the U.S. unemployment problem isn’t structural, according to Baker.

“The latest report showed that unemployment among construction workers is 11.9 percent, which means it is raising the overall unemployment rate by a bit more than 0.1 percentage point, while unemployment among manufacturing workers was just 6.7 percent. On net the unemployment in these sectors has little overall effect on the unemployment rate, which means that an explanation for unemployment that rests on workers being in the wrong sectors has no evidence to support it,” said Baker in an e-mail.

Based on data from the Bureau of Labor Statistics, the trends in job openings and the number of unemployed workers in the health-care and education sector, professional and business services sector, and information sectors suggests that if there is a serious problem of structural unemployment, then there should be some evidence of it in larger sectors, not just narrowly defined sectors of the economy, according to Baker’s report.