Nobel Laureate wrong on matters economic!

Blimey.

Much as I don\’t like Paul Krugman\’s political views (most especially on the viability of the votestealers doing anything useful with our money) I certainly respect him as an economist (and as an intellect and much, much, more so as a writer).

But this is sad:

Jargon has its uses, in economics as in many other fields. It’s hard work, and also time- and space-consuming, to translate everything into plain English, all of the time.

But that said, sometimes jargon gets in the way of understanding, especially if the term of art sounds like something else. And that’s clearly the case with “structural unemployment.”

Here’s what economists mean by “a rise in structural unemployment”: a rise in the minimum unemployment rate you can get to before you start having inflation problems.

There’s a story behind why that might happen — it might happen because unemployed workers have the wrong skills, or they’re in the wrong places, or they can live so well off the dole that they don’t really want to work, or whatever. But the measure of structural unemployment is that worsening of the inflation-unemployment tradeoff. So, for example, the demonstration that Britain suffered a large rise in structural unemployment in the late 70s through the 80s was the way inflation took off in the late 80s, even though the unemployment rate was quite high by historical standards.

No, what he\’s just described is NAIRU (the non accelerating inflation rate of unemployment), not structural unemployment.

We can indeed say that structural unemployment is that bit that\’s left over after cyclical unemployment has been soaked up: and that thus NAIRU is a reasonable enough guide to it. But that isn\’t the definition by any means.

Wrong skills, wrong places, sure, that\’s structural unemployment: dole, benefits, that\’s NAIRU. The importance of the difference being that, well, if you\’ve got a high NAIRU it really is rather important to work out why: what do we change to lower it?

Like, just as one example, time limiting benefits. Or in the US example, not extending unemployment benefits from 26 weeks to 99: that\’s NAIRU. Having squidellymillions of carpenters and roofers out of work as a result of the collapse in construction: that\’s structural unemployment. They need to retrain for other industries.

5 comments on “Nobel Laureate wrong on matters economic!

  1. I’m not sure about this. It seems to me one side are using “structural unemployment” to mean “something we cannot do much about, it’s just got to work it’s way out of the system, and attempts to cure it by raising demand will fail”. Does that also entail thinking that we’re closer to the the level of unemployment when inflation would start of kick off?

    Tim adds: Structural would be the unemployment we can’t get rid of by demand management, yes. But that doesn’t mean we can’t do anything about it: it means we have to do different things about it. Supply side reforms for example. IDS’ conditionality for benefits is one such (no, not here particularly praising such, but just pointing out that it is such a suppply side reform to try and deal with structural unemp). Retraining would be another.

  2. hmm, but Gavyn Davies’ definition does look like it agrees with Krugman? having read that, I realize how structural unemployment is related to inflation – if people aren’t competing for vacancies, perhaps because they lack the skills or cannot move house – they aren’t holding down wages. If firms have to raise wages to recruit from the poor of “non-structurally unemployed” that’s where the inflation comes in. I hadn’t made that connection before.

    Tim adds: Exactly what Richard Layard’s work has been all about. And thus things likje welfrare to work, to reconnect the structurally unempoloyed to the labour market.

  3. But in this sentence, you can simply replace Structural by NAIRU.

    “Structural would be the unemployment we can’t get rid of by demand management, yes. But that doesn’t mean we can’t do anything about it: it means we have to do different things about it.”

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