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October 01, 2010

What does "structural" mean?

On Wednesday, Federal Reserve Bank of Atlanta President Dennis Lockhart summed up one of the hot policy questions of the moment this way:

"A necessary debate is jelling on the diagnosis of our economic troubles and the appropriate prescription. As I think about it, there are three lines of argument. One argument maintains there is not enough spending occurring—in economists' terms, a shortfall of aggregate demand—and that this shortfall can be reduced by further stimulus. A second argument is that the economy is undergoing deep structural adjustments in industry composition, labor markets, and household finances, especially the level of debt, and these adjustments will take considerable time to play out. Finally, it can be argued that much of the uncertainty has to be dealt with in other areas of government, and monetary policy can't do much about this kind of problem. This characterization doesn't do full justice to the complexity of the matter, but it lays out in broad strokes what questions are in play."

In some quarters, the opinion seems to be that the debate is effectively over. On the day of President Lockhart's speech, Mark Whitehouse wrote this piece in the Wall Street Journal:

"In recent months, policy makers have puzzled over the inadequate rate at which job searchers and job vacancies are coming together. By some estimates, if openings were turning into hires at the rate they typically do, the unemployment rate should be about three percentage points lower than the current 9.6%....

"A new paper, though, suggests employers themselves are at least part of the problem. The authors—Steven Davis of Chicago Booth School of Business, R. Jason Faberman of the Philadelphia Fed and John Haltiwanger of the University of Maryland—take a deep dive into Labor Department data and come up with an estimate of what they call 'recruiting intensity,' a measure of employers' vacancy-filling efforts including advertising, screening and wage offers.

"Their finding: Employers haven't been trying as hard as they usually do. Estimates provided by Mr. Davis suggest that over the three months ending July, recruiting intensity was about 12% below the average for the seven years leading up to the recession. Their lack of effort probably accounts for about a quarter of the shortfall in the hiring rate."

Paul Krugman made note of the same issue a few days earlier:

"Job openings have plunged in every major sector, while the number of workers forced into part-time employment in almost all industries has soared. Unemployment has surged in every major occupational category."

Whitehouse mentions a solution that comes from the Krugman (and many others') playbook:

"Depressing as it might seem, the finding is in some ways encouraging. It suggests that the trouble with hiring might be more a 'cyclical' function of low business confidence than a chronic, 'structural' ailment that will last for years to come."

The "low business confidence" part sounds right, but does that make the problem "cyclical"? I'm not so sure. Let's say an employer is reluctant to post a job opening because, just for example, the cost of the new employee potentially will expand by an amount that is unknowable until the details of healthcare reform legislation are clarified. Would you call that cyclical or structural? If "low confidence" reduces the search intensity of businesses, wouldn't it be reasonable to describe the resulting drop-off in job openings "structural"?

I think a reasonable answer comes down to whether the reluctance to create a job opening would be overcome by a pickup in business activity. But that may in turn depend on whether or not businesses think they can meet that demand by expanding productivity, something they have shown great aptitude for over the course of the past three years.

Maybe businesses have reached their capacity to grow through productivity gains rather than job creation. So maybe additional policy-induced demand will be enough to overcome the uncertainties that are clearly plaguing private decision makers. But I don't see that the evidence in hand so clearly tips the scales one way or the other.

By Dave Altig, senior vice president and research director at the Atlanta Fed

October 1, 2010 in Economic Growth and Development, Employment, Labor Markets, Productivity | Permalink


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The best way to think about the difference between cyclical and structural is whether unemployment (or demand) is price sensitive or not. A structural mismatch (between worker skills and jobs or productive capacity and good demanded) can not be address by changes in price (or wages in the case of labor.) Cyclical imbalances will correct themselves as prices of goods (and labor) adjust in the marketplace.

By this argument, cyclical problems don't require government intervention, but structural problems can be addressed by government programs. There is evidence that demand has not responded to the disinflation resulting from the large output gap, leading to worries about actual deflation. As I've said elsewhere, our problem seems to be structural underconsumption, that is a drop in consumption that is not sensitive to price adjustment.

Posted by: Rajesh | October 01, 2010 at 09:02 PM

What about the NFIB survey's massive uptick in businesses citing insufficient demand as their most pressing problem?

If you are going to say this is about uncertainty stemming from government policy, shouldn't you have at least a tiny shred of evidence?

Your reluctance to believe the insufficient demand story seems basically religious rather than factual.

Posted by: David | October 02, 2010 at 03:05 AM

It seems fairly obvious that the best standard for judging the differences between 'cyclical' and 'structural' unemployment is that which separates jobs into 2 simple categories: Those which are temporarily lost as a result of contraction, and those which are gone for good (hysteresis). This puts technological unemployment in the 'structural' category, and I recognize that there is some controversy regarding this categorization; but, the simple criteria of 'gone for good', or 'temporarily lost' aligns each category with what would apply in regards to the application of stimulus. One type of unemployment that does respond to counter-cyclical stimulus: 'cyclical unemployment' at least to a degree... while 'structural unemployment' would respond to a Keynesian type of stimulus much less favorably. Consequently, it would follow that this type of categorizing , which would require analysis of individual job markets (not sectors) by occupation, would enable forms of stimulus aimed more at training and relocation assistance etc.

What this simple categorizing does though is to bring immigration into the issue on the side structural unemployment. This of course has very significant political implications, but these implications, should not be allowed to distort the economic analysis,… but that of course is easier said than done.

I live near Killeen/Ft. Hood in Central Texas. This area has no shortage of jobs, relatively speaking. The classifieds throughout central Texas list a long and varied assortment of low-paying jobs.

However, by example, I know journeyman carpenters who are unable to find jobs at half of their previous wages in capacities ranging from janitorial to maintenance etc. What little work that is available to construction workers in this area is being done by Hispanic crews, mostly by contract. These crews do not consist of undocumented workers exclusively, but fluent Spanish is a must and racially mixed crews are rare.

Part 1

Posted by: rayllove | October 04, 2010 at 11:02 AM


So, immigration, both illegal and otherwise, is causing a significant amount of 'structural' unemployment that seems to be ignored in the macro-assessments. This type of structural unemployment, which clearly qualifies using the standard of hysteresis, would also be much worse if it were not for military recruitment. In our rural areas those coming out of high-school but choosing not to attend college have very few opportunities as things are, and if those being recruited were added to the existing labor surplus the shortfall would be similar to that during The Great Depression. The graduating class that included my son two years ago had about 15% to 20% of the males recruited into the military 'before' they graduated. How many others who either joined after graduating or after dropping out I don't know, but... of all of my son's immediate friends (12), 4 of them are currently serving. My son and 3 others out of that 12 are still in school and the remaining 4 are still at home, unemployed, but of course not being counted as unemployed. These young people 'are' however structurally unemployed at least to a degree, or as compared to when I was their age and living in commensurable circumstances (hysteresis), and... it may well be that the economic framework has left us with a choice between a militaristic culture or increased levels of structural unemployment. But if we were to see structural unemployment as it actually exists... it could be minimized. If the US were for example to put as much emphasis into influencing improvements in Mexico, as it has in Iraq etc., perhaps just stop flooding Mexican markets with subsidized ag goods, at the least; then at some point the US could create more demand for its exports while also doing what is morally justifiable.

(It may have been hypocritical for me to have brought politics into this, but... I could not stop myself. Sorry) Ray L Love

Posted by: rayllove | October 04, 2010 at 11:04 AM

The principal uncertainty these days is monetary policy and its underwhelming support for the economy.

Posted by: Lord | October 04, 2010 at 05:13 PM

Not to put too abstract a point on it, but in my stable suburban neighborhood there are more for sale signs on houses than there have been at any time in the past two years. There's one new house going up, too, but it still doesn't look good for construction workers. At the same time the newspaper continues to be full of stories about the shortage of nurses. Now if the inability of one type of worker where there's a surplus to become retrained for a job category where there's a prolonged shortage doesn't spell "structural", I don't know what does. Not to mention the neighborhood swimming pool that stayed closed all summer with a "lifeguard wanted" sign on its gate.

Posted by: Jeff | October 04, 2010 at 10:12 PM

For years, companies have been moving manufacturing operations to cheaper labor markets like China. If everything we consume is manufactured elsewhere, no amount of stimulus, or any other attempt to increase consumption will result in jobs here at home. The US has been running an ever increasing trade deficit since 1976, peeking recently at $700 billion or roughly 5% of GDP. This has been going on for so long that what should have been a cyclical problem appears structural. The good news is that imbalances are never sustainable and sooner or latter countries that are hording huge amounts of US currency (like China) will have to trade it in for something produced here.

Posted by: John Cardillo | October 05, 2010 at 10:09 PM


What would keep the Chinese from trading T-bills for commodities or some other non-US-related asset? Slowly, over time, of course.

Posted by: rayllove | October 06, 2010 at 01:04 PM

Rather than hiring, what if companies that import components choose to ask foreign manufacturers to provide administrative, advertising, and other product management activities in return for say, a 2% increase in the price of the components?

The economists, reviewing the numbers, would believe the price of imports was rising while they were not; firms were both acquiring perfectly variable labor cost while avoiding future domestic regulation costs.

And that would be structural.

Posted by: WhiskeyJim | October 06, 2010 at 11:04 PM

"Trouble with hiring might be more a 'cyclical' function of low business confidence than a chronic, 'structural' ailment that will last for years to come."

It is within the realm of possibility that we, the US, will soon enter another boom. Productivity (what you economists like to measure) is about to soar. I can hold the entire library of congress in my hands. I can find South American organic beef while booking a flight. It's now moving so fast, we can't catch it.

Posted by: FprmerSSresident | October 09, 2010 at 01:06 AM

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