We have just seen the announcement of what is generally viewed as good news on the US unemployment rate, down to 8.5%.  But it is still historically quite a high level.   How should the government go about determining the priority to stimulating employment and helping accelerate the reduction in the unemployment rate given where we are right now?

The debate over the vocabulary of cyclical versus structural unemployment is a debate that shows up every time unemployment is high. In the 1930s there were people saying the problem we’ve got is a structural unemployment problem.

If it is structural then people don’t have the right skills, and stimulus isn’t going to help in that case.

Exactly.  Stimulus will cause inflation and we shouldn’t stimulate.  Of course in the 1930s it was nuts, and also in the late 1950s, early 1960s, the same debate emerged. Bob Solow gave lectures around this issue of how do you differentiate structural from cyclical unemployment, and whether there any reason to believe that in the US economy in the early 1960s, before any stimulus came along, there was completely a structural problem.

Now we have high unemployment and we obviously have a world were globalization, the computer, the Internet and all sorts of things are affecting the whole process of the labor market adapting to change.

Change is always there. Manufacturing companies have been moving to lower labor for more than a century. Blacksmithing died; there was a big drop in what they could do. All sorts of things happen and the economy adapts. That is part of the efficiency of a good capitalistic economy that people move across jobs, although it can be very hard on the people involved. Unemployment insurance and retraining programs help people deal with that.

The key issue right now is that we have some structural unemployment. It’s never zero.  Maybe because of what has been going on and things have been slow for a while, we have a bit more structural unemployment than if we took a 20-year average or something like that. But all the people who have attempted to split up structural and cyclical unemployment say the bulk of what we’ve got now is cyclical. It will respond to good stimulus.

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