Structurally high unemployment?

The CIPD reports that firms are planning to make more redundancies. This raises a concern: could we be facing years of structurally high unemployment?
Note the word “structural” here. I do not mean merely the sort of unemployment that exists because demand is weak, say because the government is slashing spending - though I don't deny that this too could be a problem. I mean the sort of unemployment that can co-exist with inflation staying around or above target.
Five things make me worry:
1. Hysteresis. Short-term unemployment can lead to longer-term unemployment, as the jobless lose skills and experience. This is a particular problem for younger workers.
2. Labour hoarding. One feature of the recession is that firms didn’t shed as many workers as you’d have expected, given the severity of the downturn in output. This suggests firms have hoarded labour, which suggests that the upturn in output - if it does continue - will lead to increased utilization of existing workers, rather than new hires.
3. Oil prices are still high. Some recent research confirms that these matter for US unemployment. They also matter for the UK, as my chart shows. Note that the oil price rises of 1973-74, 1979-80 and the late 00s all led to rising unemployment. Note too - more worryingly - that the most significant falls in unemployment, in the late 80s and late 90s, both occurred at a time of low or falling oil prices. This condition does not exist now.
4. Bank credit is still tight. This will constrain new firms from creating jobs and existing ones from expanding. There’s a widespread consensus that the recession has reduced (pdf) long-term economic growth - which means slower employment growth.
5. The trade-off between unemployment and the trade deficit has worsened, by more than can be explained merely by weak overseas demand. This is a clue that rising unemployment might be more than structural.
The big question - which should get more attention than it will - is: what can be done about this? Mere macroeconomic management is not enough. Insofar as structural unemployment is high, plain macroeconomic policies can only reduce it at the price of raising inflation. This requires the inflation target to be raised or abandoned.
Nor is it clear that cutting payroll taxes will get us far, as these might merely lead to higher wages. And anyone who thinks cutting the minimum wage will lead to large job creation has supped too much Econ 101 moron juice.
Davids Bell and Blanchflower have some ideas here. Whether these can work is, though, doubtful. As Michal Kalecki said: “Unemployment is an integral part of the normal capitalist system."

Comments

[Tom Addison]

"And anyone who thinks cutting the minimum wage will lead to large job creation has supped too much Econ 101 moron juice."

Could you please elaborate? I know many people who have a few pints of this juice morning, noon and night.

[David Massey]

Paul Krugman has done a few posts about a shift in the Beveridge curve in the US and how this indicates an increase in structural unemployment. Quick look at the data for the UK from the ONS, shows a similar pattern - data here for those interested http://www.statistics.gov.uk/downloads/theme_labour/LMS_FR_HS/WebTable21_1.xls

[Luis Enrique]

a counter argument (to the Bev curve shifting idea)

http://www.angrybearblog.com/2010/08/beveridge-curve-vs-matching-function-ii.html

[john Terry's Mum]

“Unemployment is an integral part of the normal capitalist system."

We are way way past any semblance of "normality" in the global capitalist system- thought it will not become fully apparent for some years to come.

In the mid-nineties about 100-150 million cheap manufacturing workers (mostly in India and China -- with access to technology and materials etc) became available to the global economy. This vast over capacity was disguised by the various credit bubbles.
Not any more.

This same over-capacity exists across most if not all sectors.

We are seeing an absolute collapse in the value of human labour.

[chris]

@ Tom - I have two effects in mind:
1. The miniumum wage is so low that it simply doesn't affect many workers. Cutting it would therefore mean only a small fall in overall labour costs.
2. The price elasticity of demand for labour is low in aggregate. If it were otherwise, the fall in real wages we've seen in the last two years would have led to an employment boom.
Multiplying these two things together implies that cutting the NMW would create only a few jobs.

[Robert Allen]

Of course there is going to be more unemployment as a result of structural changes to the economy, not least because of the need for everyone to clock up more years in order to counter faltering pension provision. A decade or two ago many large companies used early retirement (courtesy of healthy pension funds) to move large numbers of 50-55 year old workers out of their respective organisations, replacing them with younger personnel who did similar work for a third of the salary. This option doesn’t exist anymore: people will need to work through to their 60s and beyond: many in succeeding generations will have to wait until well into their 30s before securing a full time position.

[ortega]

"Much of today's American workforce is engaged in roundabout production, which Böhm-Bawerk equated with capital. There is no longer a meaningful distinction between labor and capital. Labor is capital.
If labor is capital, then we have lost the automatic tight connection between spending and employment. Firms can vary their output with little or no variation in employment. This explains how we can have a “jobless recovery,” meaning a large percentage increase in output without a comparable percentage increase in employment. For firms in today's economy, labor represents an investment. Firms hire workers in order to develop capabilities that will eventually produce output more efficiently. The return on an investment in workers may take as long or longer to realize as the return on investment in a machine. The return on investing in workers may be at least as uncertain as the return on investing in equipment."

http://www.american.com/archive/2010/august/when-labor-is-capital-the-limits-of-keynesian-policy

[ortega]

"When you add it all up, it costs $74,000 to put $44,000 in Sally's pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally's job each year.
(...)
And even if the economic outlook were more encouraging, increasing revenues is always uncertain and expensive. As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company's vulnerability to government decisions to raise taxes, to policies that make health insurance more expensive, and to the difficulties of this economic environment.

A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government's message is unmistakable: Creating a new job carries a punishing price."

http://online.wsj.com/article_email/SB10001424052748704017904575409733776372738-lMyQjAxMTAwMDAwODEwNDgyWj.html