…there is no hard and fast distinction between cyclical and structural unemployment. For instance, if structural unemployment in American has risen closer to European levels, it may be partly due to the decision to extend unemployment insurance from 26 weeks to 99 weeks, and to increase the minimum wage by over 40% right before the recession. Does that mean that demand stimulus cannot lower unemployment? No, because the maximum length of unemployment insurance is itself an endogenous variable. If stimulus were to sharply boost aggregate demand it is quite likely that Congress would return the UI limit to 26 weeks, as it has during previous recoveries. For similar reasons, the real minimum wage would decline with more rapid growth in demand. Aggregate supply and demand are hopelessly entangled, a problem that many economists haven’t fully recognised.
Read the whole thing. I would add a few points. First, structural and cyclical hypotheses interact in another way, namely that the degree of nominal stickiness for unemployed workers will depend on structural factors. Second, the partially structural nature of unemployment is becoming increasingly clear with time; wages are not sticky forever and we are not at risk of a downward deflationary spiral from a round of wage-cutting among the unemployed. Third, the unemployment itself is becoming increasingly structural, even if you think it was mostly cyclical in the first place. Not working is bad for people. Fourth, structural unemployment does change the appropriate mix of monetary and fiscal policies, although the net effect is indeterminate in theory. Monetary policy should be expansionary, but structural forces behind unemployment can make traditional fiscal policy either more or less effective (it is more important to target disaffected workers, but also harder to do so) and you can think of that as the frontier policy question of the day.
Here is Scott’s bleg. Could Scott be blogging again? The consumer surplus from the internet just went up.