Even Economists Can't Decide The Cause of High Unemployment

Economists are deadlocked over the root of unemployment, and it may be costing the country billions.

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One of the hottest debates in the economic community is whether U.S. unemployment woes are either primarily structural or cyclical in nature. The problem is that even the best and the brightest economists don't have a definitive answer.

To most of the public, the argument immediately may sound like wonky econo-speak, but it boils down to a simple truth: if policymakers can't understand the root of unemployment, the costly solutions—from tax cuts to stimulus—will be doomed to fail.

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"I would say it's fair to say that there are very large discrepancies in the opinion of different economists," says Adolfo Laurenti, deputy chief economist at Chicago-based financial services firm Mesirow Financial.

The automobile presents a great metaphor for each side of this argument. Cyclical unemployment—which comes from an economy with a lack of demand and low output—is like trying to start an old car on a brutally cold winter day. Structural unemployment, meanwhile, implies that there is a fundamental mismatch between workers and jobs—like trying to start a unleaded-only car with diesel fuel in the tank. In one scenario, outside factors are at play, and the car simply needs to warm up. In the other, the engine has plenty of resources, but they can't be used. And while both will sputter, the fixes aren't the same.

Of course, those vehicular problems are much easier to diagnose than the current employment crisis. There is certainly a mix of structural and cyclical factors at work, and there is also ample evidence that either one is primarily responsible for a high jobless rate.

The cyclical camp, which includes Federal Reserve Chairman Ben Bernanke, Fed Vice Chair Janet Yellen, and Nobel Prize-winning economist Paul Krugman, points to evidence of a major shortfall in aggregate demand.

"In almost every occupation, almost every location, you will see unemployment rates that are above normal," says Gad Levanon, director of macroeconomic research at the Conference Board. "There is low unemployment in some places, but even in those cases, it's higher than it used to be before the recession."

Bernanke echoed these sentiments in a March speech to the National Association of Business Economics, also noting that job-finding rates for both the short- and long-term unemployed fell during the crisis.

"If the recent increase in long-term unemployment were being driven by structural factors rather than, say, the severity of the recession, then the job-finding rates of the long-term unemployed should have fallen sharply relative to those out of work for only a few weeks," he said. "But that's not what we're seeing."

Plenty of indicators, like the latest lackluster GDP readings, indicate that output and demand are weak. But structural factors—available jobs and workers that simply are not suited for each other—are the primary culprit for job weakness, say some experts. Bill Gross, cofounder of investment firm PIMCO, as well as Minneapolis Fed President Narayana Kocherlakota, have promoted this idea.

Data on job openings versus hires suggests that this is true. Monthly hires have climbed back up to nearly 4.4 million since hitting a crisis low of around 3.7 million in June 2009. However, job openings have grown much faster, from fewer than 2.2 million in mid-2009 to over 3.7 million currently, a wide enough discrepancy to suggest that people looking for jobs are not able to fill available positions.

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"Despite the fact that we have a very high unemployment rate, there seems to be a lot of jobs that businesses are trying to fill and have failed to fill, which raise issues that maybe there is a mismatch of skills in the job market," says Laurenti, pointing to laid-off factory workers as one example. Without additional technical skills, many unemployed people are unqualified for the specialized positions that are currently available.

Laurenti says that, while the recession sent unemployment rates skyrocketing, this structural problem has been slowly building for much longer.