Unemployment and Opinion and Economic Analysis

HICKS: Why is the unemployment rate still so high?

January 12, 2013

A growing undercurrent of economists is now warning about structural unemployment (a skills mismatch), which leaves millions without jobs. This led to one online commenter to ask: “How did structural unemployment come about from a housing market collapse?” Good question.

The Great Recession wasn’t caused by a housing market collapse; it was more than that. The economic unwinding required lots of failures:

We needed home buyers willing to believe in unrealistic future price growth, lenders unconcerned with creditworthiness, financial engineers unaware of changing risk profiles, a government backing large mortgage buyers, a Federal Reserve maintaining low interest rates, workers skipping out on higher education to take jobs in construction, and millions of households taking on consumer debt in the belief that their home value would rise forever.

In short, it took nearly all of us to make this happen. So, it would be pretty improbable if, after all of this, there weren’t a significant number of workers with skills that are no longer in demand. That is structural unemployment. The size of it today, perhaps 2 percent of our work force, is striking. But there is more to the story.

The economics we learn in high school and college tends to treat the adjustment of markets as a smooth and relatively rapid process. That is true enough for some, but there’s enough imperfection in markets to cause mischief.

The failures of markets have animated much economic research over the past two decades, including your columnist’s humble doctoral dissertation. So what insights might we have uncovered about great recessions and unemployment?

Suppose that financial or housing bubbles breed bubbles elsewhere. These bubbles may be in labor markets for construction workers, for example, or in factory work for construction materials or household appliances or cars. When one bubble bursts, the others follow suit.

I will explain these market adjustments using two examples borrowed from the physical sciences. First, think plate tectonics—the way continents move. Over time, force builds as huge land masses press against one another, but it is released in an instant. This is an earthquake.

Second, think of the punctuated equilibrium in evolution surmised and made popular by Stephen Jay Gould. Instead of evolution happening slowly over time, he concluded, some great stress or environmental change on species led to rapid evolutionary changes. Once the adaptation was finished, the species spent a lengthy time without noticeable change.

Either of these phenomena can be used to explain (mathematically) why this recent economic shock led to a large level of structural unemployment. But we don’t really have to rely on naturalists on these matters.

The economist David Ricardo wrote about this problem 44 years before Darwin and a full century before plate tectonics. What he observed then is what plagues us today: many workers without the right skills facing long bouts of unemployment.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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