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The Structural Signature? Just look closer...

Mr Krugman argues that current U.S. unemployment as nothing to do with a structural misallocation of jobs that is being corrected by the market (“The Structural Signature”, May 8, 2012). Indeed, as any keynesian, Mr Krugman believes that the current recession was caused by a general slump in demand which itself is a consequence of U.S. consumers being too pessimistic.

As Mr Krugman rightly suggests, the structural theory implies that if “we had too many workers in the wrong industries, […] we have to expect a depressed level of overall employment as workers are moved out of these ‘bloated’ sectors.”

Using employment data from the BLS, Mr Krugman shows that change in total employment in construction, manufacturing and services between 2007 and 2011 is about the same (losses of over 2 million jobs). Thus, Mr Krugman concludes that “the signature of a structural problem just isn’t there” and asks us to trust him as “a closer look doesn’t do much better.”

Oh really? Well let’s give a closer look anyway.

First, maybe Mr Krugman didn’t noticed that the sizes, in terms of total employment, of the “construction”, “manufacturing” and “services” sectors are hardly comparable. In 2007, the construction sector employed 7.6 million people in the U.S. – that is 5.5% of total employment. The same year, the manufacturing sector and the service sectors (which is a group of sectors in BLS statistics) were providing 10.1% and 83.8% of all U.S. jobs respectively. In other words, employment in the service sector has been reduced by 2%; employment in the manufacturing sector fell by 15% and employment in the construction sector dropped by a eye-popping 28%.

Second, job losses in the manufacturing sector are nothing new. As a proportion of total U.S. employment, manufacturing is losing ground since – at least the 1960’s. In fact, once corrected by the change in overall U.S. employment, the decline in manufacturing jobs between 2007 and 2011 is just in line with a four decades-hold trend. This simply is a consequence of improving productivity and outsourcing of non-core activities such as cleaning services or workplace restaurants.

Now let’s be more specific.

The structural theory – or let’s rather say the Austrian Business Cycle Theory – says that the combination of loose monetary policy from the Fed and so-called “affordable housing” policies from the U.S. government have created a housing bubble and massive misallocation of resources in the real-estate sector. If this is correct, we should indeed expect that more jobs have been destroyed in the construction sector, in proportion of the total number of person employed, that in the rest of the U.S. economy.

Here are the figures, from the same BLS statistics set:

% Chg (2007-2001)
Total employment-4.5%
Construction-27.9%
Manufacturing-15.5%
Information-12.3%
Financial Activities-7.5%
Trade Transportation & Utilities-6.0%
Professional & Business-3.4%
Other Services-2.8%
Leisure & Hospitality-0.8%
Mining & Logging+8.3%
Education& Health+8.5%

As Mr Krugman says, “that doesn’t settle the case entirely” but maybe this will help him to see the “signature”.

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Addendum

Maybe Mr. Krugman should also have checked employment statistics in Ireland (see Employment and Unemployment from the Irish Central Statistics Office).

Between April-June 2007 and April-June 2011, the Irish economy has lost 292,600 jobs. Since labor force has been reduced by 91,100 (many Irish have emigrated, others have just stopped looking for a job), unemployment grew by 201,400 over the period.

In the construction sector alone, 164,200 jobs have disappeared; that is 82% of unemployment growth and 61% of the workforce employed in that specific sector in April-June 2007.

According to the same statistics, with more than 42 thousand jobs created (+18.6%) between April-June 2005 and April-June 2007, the construction sector has been the main job creator in the Irish economy both in absolute and relative terms. As a result, in April-June 2007, almost 13% (!) of the Irish employed workforce was working in that single sector.

Does it looks like a “structural signature” enough?

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Re-addendum

Same conclusion in Spain. According to the Instituto Nacional de Estadística, over the 2.2 million jobs were lost between 2008 and 2011 of which 1.1 million in the construction sector alone. Over the period, employment in the construction sector dropped by more than 43%. In 2008, 15.8% of Spanish employments were provided by this single sector.

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