Configuration Unemployment: Measuring Structural Problems in a Contemporary Economy

unemployment“The fact that it has not disappeared from the planet, and could potentially return to countries like the U.S. under the right conditions,makes sector analysis as a measure of structural unemployment look more like the cyclical model”

By Holly A. Bell

In a recent article, Paul Krugman asked: “Is there any point to economic analysis?”.  The reason for his frustration is that “Beltway conventional wisdom has settled on the proposition that high unemployment is structural, not cyclical, even though there is now a bipartisan consensus among economists that the opposite is true.” Using the narrow definition of structural unemployment, Dr. Krugman is exactly right. When utilizing economic models for structural unemployment, we would expect employment disruptions in specific industries and areas of the country, including high unemployment in the vanishing sectors and shortages of workers in the emerging area of the economy. The shift from a manufacturing to a service economy would be one example. Absent these factors, economists assume a cyclical rather than a structural unemployment problem. So technically, like when John McCain said during the 2008 Presidential campaign that we were not in a recession because the U.S. had not yet recorded 6 months of negative growth, the models indicate something different from what the pundits are pronouncing. But let us not forget that in the case of the recession, the pundits were correct and the models were lagging.

A Different Form of Structural Unemployment

 Is it possible that the narrow focus of traditional economic models of structural unemployment are not adequate to measure the complexities of the dynamic economic structures of a contemporary economy? Gone are the days when national economies were isolated entities that could be measured based on the assumption that all economic activities that exist are taking place within their borders. In the case of manufacturing, the world did not quit producing things, it simply moved to other locations. The fact that it has not disappeared from the planet, and could potentially return to countries like the U.S. under the right conditions, makes sector analysis as a measure of structural unemployment look more like the cyclical model.

So what factors might need to be considered in a domestic economy in a globalized environment to determine if its “structure” has changed? For purposes of discussion, we will call this “configuration unemployment” to differentiate it from the traditional structural model. The first factor to consider might be the proportion of full-time to part-time jobs in the economy. Structural unemployment models suggest that at a given wage, the quantity of labor supplied exceeds the quantity of labor demanded because there is a ‘mismatch’ between the number of people who want to work and the number of jobs available. Under the configuration unemployment model it could be argued that a structural problem exists when, at a given wage rate, the quantity of labor desiring full-time employment exceeds the quantity of full-time workers demanded. This is an economic structure problem that may be the result of a mismatch between the number of full-time employees the company could hire at full capacity and the disincentives in the economy to hire additional full-time workers.

A second factor to consider in configuration unemployment is the labor force participation rate, which has been steadily declining. Structural unemployment is considered to be a more permanent form of unemployment, with the only hope of improvement coming in the long run. If the labor force participation rate is declining because people have given up looking for work, this is an indicator of a long-run configuration unemployment problem that is consistent with a structural problem, not a cyclical one. This is because the structure of the labor force is changing. One issue is the inability of young people, even those with college degrees, to get jobs in their field. This has the potential to be a long-run configuration unemployment problem, as eventually older workers will be forced out of the workforce, while younger workers will be underprepared to take their place. There may be an entire decade or more of college graduates who because of their timing in entering the workforce may never work in their fields, as more recent graduates take the new jobs when they become available.

A third factor to consider is the degree of globalization of the domestic economy. While globalization is recognized as a factor in structural employment, it is viewed a bit differently than considered here. The fact that there are not enough jobs and no shortage of employees in the new service sector indicates that unemployment in the U.S. is not a traditional structural unemployment problem. But the analysis of sectors needs to be done at a global level, including the percent of that sector that resides in the national economy as there remains more labor supply at a given wage rate than there are demands for labor in the service economy. One way to fill that gap is to increase the percent of the manufacturing sector—or any other underrepresented sector—that resides in the U.S.. Under configuration unemployment, available sectors on a global scale should be considered a structural problem if the existing domestic sectors are not creating enough jobs, at a given wage rate, to employ all those who want to work. This implies that the U.S. might not have the right mix of available sectors, which is an economic structure problem.

Many economists argue we don’t want these underrepresented sectors back because the jobs won’t pay as well as they have in the past. Regarding manufacturing, one pundit compared the $15 hourly rate paid by manufacturing jobs to what a babysitter makes in New York City. I would encourage him to visit my hometown in Wisconsin, where the median household income is $41,000 a year. If a manufacturer came to town offering permanent full-time, $15 an hour jobs with benefits people would be lined up for miles to apply. Plus, the only way to increase wage rates across in all sectors is to increase the number of jobs available across sectors.

A final factor to consider is the ratio of domestic company capital that is remaining overseas rather than being reinvested in the domestic economy. Traditional models of structural unemployment did not take into consideration the fact that domestic economic capital could remain overseas. This creates a capital structure issue that should be considered in configuration unemployment. Are profits being invested outside the country reducing the capital expenditures that would have produced jobs domestically? And, have they kept U.S. corporate tax revenue lower than it would have been, shifting a greater portion of the tax burden to citizens. Where capital resides, and how it is used, impacts the structure of the domestic economy.

So while the indicators of structural problems in the U.S. economy do not fit neatly into the narrow focus of the structural unemployment model, it does not mean there are not structural problems that are leading to unemployment. Perhaps the consideration of additional factors more consistent with in our dynamic, globalized economic environment might lead us to a better understanding of our unemployment challenges as well as solutions.

Holly A. Bell is a business and economics professor in the University of Alaska system and an author, analyst, manager, and blogger who lives in the Mat-Su Valley of Alaska. You can visit her website at www.professorhollybell.com or follow her on Twitter at @HollyBell8

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Unemployment image courtesy of Stuart Miles

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