US unemployment: Structural vs Cyclical

A recent paper from FRBSF econs says it is cyclical.

They look at employment of college graduates. If it is a structural unemployment then one should see employment rising in college graduates as there is no problem of skill mismatch etc. But they find employment has declined even in college graduate space. Hence it is more of a cyclical problem with lower demand for labor across sectors.

One way of testing whether such structural factors are important in the overall labor market is to examine a segment of the market that is not subject to these constraints. Recent college graduates for the most part don’t experience skill and geographic constraints because they tend to be highly educated and mobile (Pianalto 2010). Thus, if structural unemployment were the principal factor accounting for labor market weakness in this downturn, then the job market for recent college graduates would be relatively stronger than in a mainly cyclical downturn.

In this Economic Letter, we analyze the extent of structural constraints on employment by comparing current trends for recent college graduates with the trends that prevailed during the recovery after the 2001 recession, a labor market downturn that was mainly cyclical in nature. We find that the labor market for recent college graduates is equally weak or even weaker than the overall market, just as in the 2001 recession and its aftermath. The weakness of the current labor market for college graduates is reflected not only in the unemployment rate for this group, but also in their part-time employment rate and earnings. This indicates that structural factors are of minor importance for current unemployment.

Apart from rise in unemployment they find that weak labor market has lowered the wages of employed college graduates as well. Their earnings are just around what graduates earned in 2007. Worse grads recruited in recessions have depressed earnings for a longer time:

If structural constraints were at play, the wage growth of a labor-force subgroup with general skills and high mobility, such as recent college graduates, would outperform or be in line with wage growth in the overall labor market. That’s because recent college graduates are more mobile and adaptable, and are more able to make the adjustments needed to take hard-to-fill positions. However, recent college graduates are not seeing above-average earnings growth. Recent graduates with full-time positions are currently making about as much as workers who had just graduated from college at the end of 2007, when the recession began. In contrast, earnings for the average worker grew 7.3 % over the same period. This drop in the relative earnings of recent graduates has been particularly steep in recent months, similar to what was observed in the 2001 recession. Importantly, the relative wages of recent college graduates continued to decline during that downturn until well into the recovery. Since the current recovery has not yet reached a comparable stage, we expect continued downward pressure on the relative wages of recent graduates.

The effect of the very weak labor market for recent college graduates is likely to go beyond their current employment and earnings prospects. Graduating from college during a recession has significant and persistent negative effects on future earnings (Kahn 2010 and Oreopoulos, von Wachter, and Heisz 2010). Given the current weak labor market, we expect the labor market outcomes of the recent college graduate cohort to remain depressed well into the future.

Interesting bit.

Krugman likes the paper…

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One Response to “US unemployment: Structural vs Cyclical”

  1. Mahesh Says:

    Thanks for sharing. Really good.

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