Aggregate Demand vs. Structural Unemployment

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The U.S. unemployment rate has been stuck in the range of 9.5% to 10% since the beginning of the year, with many uncounted discouraged workers and many underemployed part-time workers.  Does this mean that we have structural unemployment?  Brad DeLong published a short paper today[i] arguing that our unemployment problem is currently due to inadequate aggregate demand, not structural unemployment.

DeLong explains that if we suffered from structural unemployment, then some sector such as construction would have high unemployment but another sector such as manufacturing would be booming and employers would be seeking qualified workers without success.  The actual situation, DeLong argues, is that almost all sectors of the economy have seen significant declines in employment, which is a symptom of inadequate aggregate demand.

Paul Krugman argued as usual yesterday that the $800 Billion American Recovery and Reinvestment Act of 2009 was wholly inadequate, providing mainly tax cuts, unemployment extensions and meager aid to state and local governments that was barely enough to offset declining state tax collections in the short term and not nearly enough to compensate for the precipitous decline in demand in the private sector in 2008-2009.[ii]

This does not mean that we are not in danger of falling into the trap of structural unemployment.  If the current high rate of unemployment persists for two or three more years, the long-term unemployed will lose their skills and become unemployable.  Then we will be in a worse economic mess than we are in now.  That is the danger of electing a Republican majority in Congress, which will block any further proposals by President Obama to stimulate the economy.

I reiterate the reasons for high unemployment in the U.S.[iii]

  1. Inadequate aggregate demand.
  2. Migration of jobs to other countries, especially China.
  3. Increased productivity of employed workers.
  4. Inadequate credit for small businesses.
  5. Uncertainty about future taxes and regulations.

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