The New Reality of Heightened Structural Unemployment

Mark Thoma, who has a new blog, ponders a "new normal" (read: higher) unemployment rate. He points to something both NDN and Thoma have been writing about: concerns of higher structural unemployment.

I expect structural unemployment to be higher than it was, particularly in the next few years. We had too many resources in housing, finance, and automobile production, and it will take time for the economy to make the necessary structural adjustments. When this is combined with continuing globalization, as well as the higher savings rate and correspondingly lower consumption expected from households in the future, both of which cause structural change within the economy, the expectation is that the new target rate of unemployment will rise above the 4 percent level it was at before the recession.

Exactly how much it will rise and for how long is hard to say. A 5 or 6 percent rate, or even somewhat higher is certainly imaginable, but getting it right is important. If policymakers target an unemployment rate that is too low, they risk causing inflation (one reason for the high rate of inflation in the 1970s is that the Fed targeted a 4 percent unemployment rate when the actual rate of normal unemployment was much higher due to structural and demographic change). If they target a rate that is too high, then they risk having people be unnecessarily unemployed in the economy.

He goes on to point to a few ideas of how to deal with this - worker training and extended unemployment benefits among them. With unemployment at 10 percent, there are massive challenges involved in bringing that level back to "normal," but, as we craft economic policy going forward, it is important to understand that we're not going back to what we had, and policy must be responsive to the new economic realities. 

NDN believes this structural change, as well as the structural changes that have de-linked GDP and wage growth, represent the great governing challenges of the day. For years we've pointed to a three part agenda to deal with these issues. This agenda includes containing health care and energy costs, accelerating innovation, and investing in infrastructure and skills, all steps that will have to be taken to create broad based prosperity in the 21st century economy.