Let’s Face It: Anemic Job Creation Isn’t “Cyclical.” It’s the New Normal.

Taking the Long View of the Global Economy
April 9 2014 3:27 PM

Reality Has No Partisan Bias

It’s time to face facts: The problems facing the American jobs landscape are structural, not cyclical.

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Illustration by Lisa Larson-Walker

In the wake of last week’s job report, there has been a flurry of new debate about what precisely is keeping job creation in the United States so anemic.

The pivotal issue is whether the challenges facing the job market are cyclical or structural. The cyclical hypothesis is that we are still suffering an employment hangover from the financial crisis and sharp recession of 2008–09, made worse by limp or insufficient government responses. The structural hypothesis is that the job market has elementally shifted, and that regardless of whether GDP growth or overall economic activity ticks up, and regardless of short-term government responses, we are in for a long period of higher unemployment as millions are caught in a generational economic transition.

Zachary Karabell Zachary Karabell

Zachary Karabell is an author, money manager, and commentator. His most recent book is The Leading Indicators: A Short History of the Numbers That Rule Our World.

This argument is nowhere close to being resolved, but what’s surprising is the degree to which the argument has been forced into a partisan framework. Diagnosing what is happening—that is hard enough. But the prevailing assumption is that structural arguments are a cover for conservatives who want to cut government spending and undermine the Obama administration, while cyclical arguments are simply handmaidens to more activist government.

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Paul Krugman has been pounding the cyclical drum for years and reiterated it yet again last week. The stimulus plan of 2009 was predicated almost entirely on a cyclical view of employment that tried to find the correct formula for how much to spend in order to bring employment back to precrisis levels. Krugman is also one of the main perpetrators of the partisan school and has routinely belittled those making a structural argument as lackeys of the Tea Party or of conservatives in general. Also in the cyclical camp, whether it wants to be or not, is the Federal Reserve. Its “dual mandate” to insure full employment is tethered to a thesis that says more money in circulation will spur demand, investment, and production, which will in turn eventually lead companies to hire.

Yet the past five years have not played out that way, and there are two ways to view why they haven’t. One view is that major financial crises lead to longer cycles, so returning to acceptable employment levels takes a lot of time. The other view is that this isn’t a cyclical problem but a structural one.

After the most recent jobs report came out, Tyler Cowen argued that although some of the blame can be placed on the financial crisis, there’s also automation and lack of skills among many (especially men without college degree) that contribute to much of the current employment disconnect. A similar case is made at greater length by Erik Brynjolfsson and Andrew McAfee in their recent book The Second Machine Age. Glenn Hubbard, dean of the Columbia Business School, also argued for the structural case in a long piece in the Wall Street Journal over the weekend. Add me to that camp, as I’ve been making the structural case for the past five years.

The longer that unemployment, underemployment, and long-term unemployment remain high relative to the previous decades, the harder it is to support the cyclical case. If you are a member of the cyclical camp, you can offer a variety of explanations about why, even with GDP growth steady, employment growth has been less than stellar. First, statistically, all of the jobs that evaporated with the Great Recession have, as of last week’s jobs report, reappeared. Of course, the number of workers has grown even more, and the number who have dropped out of the labor force entirely has also grown, which is why that achievement feels less than stellar. Second, you can—as Krugman and many progressives do—claim that the recession and crisis were so severe and that the government’s response was so relatively meek that it shouldn’t be surprising that we are still a ways from where we should be.

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