Sunday, August 18, 2013

Is High Unemployment Cyclical or Structural?

There has been much debate on legal blogs recently concerning whether legal unemployment is cyclical or structural.  This question is important because it helps decide what is necessary in legal education reform.  For example, Frank Pasquale has argued, "The [ABA] Task Force strongly believes that there are 'structural changes' in legal employment. The 'structural vs. cyclical' dispute over the causes of unemployment is deeply ideological."  He continues, "For every 'death of biglaw' story, there's a skeptic who's heard it all before."

The same debate has been occurring with economists.  Recently economist and New York Times Columnist, Paul Krugman argued that high unemployment is cyclical, not structural.

He quotes Eddie Lazear: "This has led many to conclude that structural changes have occurred in the labor market and that the economy will not return to the low rates of unemployment that prevailed in the recent past. Is this true? The question is important because central banks may be able to reduce unemployment that is cyclic in nature, but not that which is structural. An analysis of labor market data suggests that there are no structural changes that can explain movements in unemployment rates over recent years. Neither industrial nor demographic shifts nor a mismatch of skills with job vacancies is behind the increased rates of unemployment. Although mismatch increased during the recession, it retreated at the same rate. The patterns observed are consistent with unemployment being caused by cyclic phenomena that are more pronounced during the current recession than in prior recessions."

Krugman continues: "Indeed: one strong indicator that the problem isn’t structural is that as the economy has (partially) recovered, the recovery has tended to be fastest in precisely the same regions and occupations that were initially hit hardest. . . . So the states that took the biggest hit have recovered faster than the rest of the country, which is what you’d expect if it was all cycle, not structural change."  Similarly, "the occupations that took the biggest hit have had the strongest recoveries."

He concludes: "In short, the data strongly point toward a cyclical, not a structural story — and there is broad agreement, for once, among economists on this point. Yet somehow, it’s clear, Beltway groupthink has arrived at the opposite conclusion — so much so that the actual economic consensus on this issue wasn’t even represented on the [PBS] Newshour."

The PBS Newshour replied: "But I rather doubt Krugman's assertion that there is an 'actual economic consensus' on the unemployment debate that favors his cyclical explanation to the exclusion of the structural. Unless, of course, Krugman means a consensus among economists he agrees with."

They continue, "But quite apart from sentiments and loyalties, I think Baker [another commentator] and Krugman were not simply being ungenerous, but misleading. Is it really 'humbug' to suggest that there's a mismatch between employers and job seekers in today's U.S. economy?"

They note, "Here's what Brooks went on to say on the NewsHour on August 3":

When "this recession started a number of years ago, you had 63, something like that, out of 100 Americans in the labor force. Now we're down, fewer than when the recession started (below 59 percent employment/population ratio). And so that suggests we have got some deep structural problems. It probably has a lot to do with technological change. People are not hiring -- companies are not hiring human beings. They're hiring machines.

"It probably has to do with a skills shortage, that as technology increases, skills have got to keep up and skills are just not keeping up. It has to do with some sociological changes, men dropping out of the labor force, women, and especially young women, never entering the labor force.

"And so these are deep structural changes. And I think there's a consensus growing that something really fundamental has shifted in the economy."

So, as you can see the debate in the economic world whether today's high unemployment is cyclical or structural is just as confusing as it is in legal education.  (For more see here)

I can point out one clear structural problem in the legal market:  While law schools are turning out more attorneys than can obtain jobs, there is a large unmet legal need for the poor and sometimes for the middle class.

(Scott Fruehwald

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