Are you cyclically or structually unemployed?

By Tanner Strutzenberg on July 7, 2011

The phrase "jobless recovery" is one we have become all too accustomed to hearing in the financial news.  Economists assure us economic growth is underway, but most Americans take little comfort in knowing that the recession officially ended in June 2009.  At that time, the official unemployment rate was 9.5%.  Fast forward 24 months to the present, and the most recent figures from the Bureau of Labor Statistics place the official rate at 9.1%.  Over the past 2 years, GDP has grown at an approximate average annual rate of 2.4%, while unemployment has only fallen by a net 0.4% over the same period.  The failure of the recovering economy to create new jobs has led many economists to speculate that the labor market is suffering from something much more severe than simple lack of demand for workers.

Many economists fear structural unemployment has taken hold in the American economy, which occurs when the workers available lack the necessary job skills to fill positions in growing sectors.  For example, a carpenter who has been laid off from his job in the construction industry cannot readily go seek employment in a booming sector like information technology or health care.  Thus, while job openings exist, the unemployment rate will not decline until more workers have the skill needed to perform the jobs available.

It is extremely difficult to calculate the percentage of structural unemployment in the labor market as a whole.  Take our carpenter again as an example.  The carpenter has been out of work for, say, 18 months now because there are no constructions projects going on in his area.  The housing market collapse, however, is a largely cyclical phenomenon.  There was a bubble that burst, and now the market is slowly sorting through the issues created by oversupply in the past decade.  In several years, the market will rebound and carpenters will again find new employment opportunities.  It seems easy enough to simply put a check next to the carpenter's name in the cyclical unemployment column.

On the other hand, no one would seriously say to the carpenter (who deserves a name at this point) "Don't worry, Jeffery, you're cyclically unemployed, not structurally unemployed.  Just wait it out a few years and you'll be right back to work."   Presumably, our carpenter has pressing financial obligations, not to mention mouths to feed that cannot wait several years.  The carpenter needs to either continue searching for work in an extremely tight market, move to another location where perhaps jobs in his field are more readily available, or begin looking for work outside his industry.  Thus, as we can see over time, cyclical unemployment becomes structural unemployment.

The issue of cyclical versus structural unemployment are naturally of great interest to tenured academics and financial market analysts, but why does any of this matter to our Jefferey?  Let's review his options.  He hasn't had any luck finding work in his present location over the last 18 months, so let's rule that out.  He needs to either move to a more promising locale, or look at gaining some new skills so he can seek employment in a different sector.  Both options are quite costly, both financially and in non-pecuniary terms.  Now imagine millions of Americans precisely in Jefferey's situation, and you can begin imagining the problems associated with widespread structural unemployment.

What sectors are hiring?  Which ones are stagnating?  And what can be done at the public policy level to help workers find new jobs in new sectors?  Tune in later this week to find out how structural unemployment could effect your bottom line.