Structural Unemployment Aggregate Demand, and Inflation

Recently another doubt has been expressed about the efficacy of expansionary monetary-fiscal policy to reduce unemployment without causing inflation. This is the fear that we have a growing amount of “structural unemployment” which is relatively insensitive to expanding aggregate demand. Structural unemployment is a serious mismatch between the jobs that open up with rising demand and the skills and locations of unemployed workers.

The post-World War II expansions have left substantial amounts of unemployment. While unemployment fell to 2 or 3 per cent in some earlier prosperities, the boom of 1955—57 only reduced it to 4 per cent, that of 1959—60 to only 5 per cent, and that of 1960—67 to just under 4 per cent. Some observers argue that this persistent unemployment reflected not inadequate aggregate demand but instead a more rigid and less mobile economy in which the unemployed workers just don’t fit the jobs that open up.

“Structural unemployment” is hard to define precisely. It results from the failure of unemployed workers to move reasonably promptly into other jobs because of lack of information on job openings, inadequate skills for the new jobs available, financial inability to move to other areas, low IQ.’s, laziness, and the like—in contrast to unemployment caused by inadequate total demand. There are jobs available in the economy, but the structurally unemployed can’t find or fill them. With an increased rate of “automation,” many feel that structural problems have increased substantially—old skills rapidly become obsolete and major retraining is necessary if the unemployed are to find new jobs.

An example is the middle-aged West Virginia coal miner, thrown out of work a decade ago by mechanization of the mines, uneducated, unskilled except in coal mining, and abjectly poor, living on his little garden patch and perhaps a small government relief check. Even though there are plenty of jobs open elsewhere for college graduates, for skilled machine tool operators, for computer programers, these have little relevance to him. And expanding a~regate demand further isn’t going to make much difference to him. It will just bid up the wages of the skilled workers who fit the expanding job categories.

In a rapidly changing economy there are always many thousands, even millions, out of work between jobs as consumer demands shift and technology changes. In 1966, for example, 10 million workers changed jobs sometime during the year. For most workers, such frictional unemployment is brief, although months between jobs is not uncommon. There is some level of aggregate demand (for example, during World War II) that will draw almost everybody into some job promptly. If consumer demand is strong enough, businessmen somehow find the workers needed and train them on the job if there is no other way. The profit incentive is a powerful weapon against structural unemployment. But that much aggregate demand may generate inflationary pressure long before all marginal workers are employed.

There is certainly some structural unemployment in our economy. The West Virginia coal miner above is an example. But the evidence is strong that more aggregate demand effectively pulls most of the unemployed back into jobs, even when they appear to he structurally unemployed. While structural unemployment is always a problem for some, there’s little evidence that it’s worse now than before.

The recent experience of Pittsburgh, a major steel center, is a good example. In early 1962 the unemployment rate in Pittsburgh was over 11 per cent, compared to a national average of about 6 per cent. Pittsburgh was a major “labor surplus” area. Employment in the steel mills had been declining persistently since World War II. The steel companies could produce one-third more steel than 10 years previously, with fewer men. Pittsburgh was cited as a classic case of structural unemployment—unemployed steelworkers whose jobs were gone forever and who were ill-equipped to take on other jobs and unwilling or unable to move to other areas.

But after the strong economic expansion of 1964, Pittsburgh unemployment at year-end was only 3.7 per cent, compared to over 5 per cent foi the nation. Rapidly growing aggregate demand boomed needs for steel in the economy. Mills called displaced workers back to their jobs. But more important, over the years 1960—1964 more than 100,000 people emigrated from the Pittsburgh industrial area as more jobs opened up elsewhere in the United States. Areas like Pittsburgh, specializing in production of durable goods, are especially susceptible to swings in aggregate demand. But the Pittsburgh experience emphasizes that what appears to be long-run structural unemployment may be eaten away rapidly by growing aggregate spending. There is certainly some “hard core” of unemployed workers who will find it very hard to locate and qualify for new jobs. But the hard core is of ice, not of iron. We can melt much of it away under the sun of strong aggregate demand.

Still, steps to improve the mobility of workers between jobs represent a net gain to society. Improving labor mobility and the efficiency of the labor market through government job-information exchanges, retraining programs, moving allowances, and the like, are appropriate to the structural-unemployment problem however big it is. European experiences suggest that far more can be done than we have yet tried. In any event, it is important to see that strong aggregate demand and improved market efficiency are complementary, not competitive, policies to help achieve high employment without inflation.