Monday, January 10, 2011

How much unemployment is structural?

Raghu Rajan cites the work of Erik Hurst:
As my colleague Erik Hurst and his co-authors have shown, states that had the largest rise in construction as a share of GDP in 2000-2006 tended to have had the greatest contraction in that industry in 2006-2009. These states also tended to have the largest rise in unemployment rates between 2006 and 2009.
The unemployed comprise not only construction workers, but also ancillary workers, such as real-estate brokers and bankers, as well as all those who work on houses, such as plumbers and electricians. So, the job losses extend far beyond those in the construction industry.
It is hard to believe that any increase in aggregate demand will boost the housing market – which, remember, was buoyed by visions of steady price appreciation that few seem likely to hold today – sufficiently to re-employ all these workers. Hurst estimates that this "structural" unemployment may account for up to three percentage points of total unemployment. In other words, were it not for construction, the US unemployment rate would be 6.5% – a far healthier situation than today.
Update: Erik sends me the following email.
I saw that you linked to Raghu’s writings which described some of my work in progress assessing labor market mismatch and its potential effects on current unemployment rates (joint with Kerwin Charles and Laura Pilossoph). There was, however, an error in Raghu’s assessment of our work. I am emailing Raghu as well. Raghu reported that we are finding that upwards of 3 percentage points of total U.S. unemployment can be explained by structural forces. That is not what we have found. Preliminary back of the envelop calculations suggest that upwards of 3 percentage points of the unemployment rate in high unemployment rate states like Nevada or Arizona may be due to structural forces – not 3 percentage points of total U.S. unemployment. The amount of total U.S. unemployment explained by structural forces will almost certainly be much less. For many states, back of the envelop calculations suggest that structural forces are much less important. I have not yet computed a back of the envelope calculation of the total unemployment rate that potentially can be explained by structural forces. While we are definitely finding results that structural forces are at play, we are not finding that 3 percentage points of the current total U.S. unemployment rate is due to structural forces. As the research evolves, however , our conclusions may change.
I want to stress that the work is still in its early stages. We are in the process of formalizing everything now. We are still a month or so away from having a preliminary version of the paper. I will keep you posted when we have something that we feel comfortable sharing for public consumption.
If you can post this message to your readers, it would be much appreciated. Based on your post, I have received lots of emails about our preliminary (and not yet ready for prime time) work. Hopefully, the correction will help to focus people’s queries and questions accordingly.