Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Saturday, April 30, 2005

Structural vs. Cyclical Unemployment

I have never liked the distinction between cyclical and structural unemployment. Maybe it is useful for some purposes, but it is at least as likely to be misleading as useful. Stephen Ayer notes the following use of the distinction in a NY Fed paper by Groshen and Potter

Cyclical adjustments are reversible responses to lulls in demand, while structural adjustments transform a firm or industry by relocating workers and capital. The job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid-off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes, however, are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job.
I propose a different scenario:

Suppose there is rapid technological change in a number of industries. Suppose further that as a result, the marginal productivity of labour sky-rockets in those industries. Labour is attracted to those industries, not forced from the old, unchanging industries. Old industries decline and jobs are lost there, but at the same time, there are many new jobs and opportunities in new and growing industries.

How long does it take labour to move from one job to a different one? In general, probably no longer than it takes to sit home on unemployment waiting for a call-back on a cyclical unemployment job.

I much prefer to think of unemployment as job search.
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