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Bretton Woods Blogging: Christina Romer: High Unemployment Is Not a New Normal

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Sitting across the ballroom, Mark Thoma emails me to take a look at:

Christina Romer: High Unemployment Is Not a New Normal: IT takes a while to match people with jobs, so even in normal times the unemployment rate is never zero. Before the recent recession, in the view of many economists, the lowest sustainable rate of unemployment in the United States — a level known as the normal or natural rate of unemployment — was around 5 percent.

The turmoil of the last few years, however, has shaken up the economy. Is it possible that it has affected the natural rate of unemployment — increasing it to 8 or even 9 percent?... Strong evidence suggests that the natural rate of unemployment actually hasn’t risen very much.... Consider the effects of changes in industrial composition. The housing bust and financial crisis led to a decline in construction and finance employment that is likely to be long-lasting. Does that imply a substantial rise in normal unemployment? Almost surely not. Compared with the pre-crisis days, about 1.3 million more construction and finance workers are out of work. Even if they all remained permanently unemployed — which is obviously unrealistic — this change would add less than a percentage point to the normal unemployment rate. More fundamentally, the economy can usually cope with changes in industrial composition. During normal times, industries decline and grow, and displaced workers move to new sectors. For example, manufacturing jobs declined steadily as a share of total employment in the 1990s, yet the normal unemployment rate remained very low.

The real problem today is that jobs are scarce in just about all sectors.... [W]orkers who have lost jobs in construction and finance have been leaving the ranks of the unemployed at almost the same rate as those laid off in less troubled industries. The problem isn’t about particular sectors; it’s about a general lack of hiring.

What about declining geographic mobility?... [T]he argument that such “house lock” is a source of high unemployment runs into two empirical walls. First, jobs are not plentiful anywhere.... Second, if house lock were an important factor, we would expect to see greater declines in labor mobility in states with more underwater mortgages....

Narayana Kocherlakota... pointed to a recent climb in posted job vacancies as evidence that current unemployment is mainly structural.... But this analysis misses the fact that early in recoveries, vacancies typically rise relative to unemployment.... [M]ost of our high unemployment is still the consequence of low demand. Consumers remain hesitant to spend because unemployment and debt are high. Companies are unwilling or unable to invest because customers are few and credit is still tight.

This diagnosis suggests that the appropriate remedy is to stimulate demand.... Federal Reserve could take.... More public investment (as the president has advocated), additional aid to state and local governments, and a cut in payroll taxes for employers would all help....

REGARDLESS of the cause of extended high unemployment, it is a disaster for families, the economy and government budgets. Thus, if I am wrong, and more unemployment is structural than the current evidence suggests, this is no excuse for washing our hands of the problem. Only the nature of the needed policy response would change. Instead of focusing on increasing demand, we would need policies to help workers and jobs find one another, measures to move workers to where the jobs are (or vice versa), training programs and better education.

And even though today’s unemployment appears mainly cyclical, it could turn structural. The longer that unemployment remains high for cyclical reasons, the more likely that job prospects for unemployed workers will be permanently damaged...