Structural Unemployment - Theory of Inflation, Macroeconomics Video Lecture | Macro Economics - B Com

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[Alex] Structural unemployment
is persistent,
long-term unemployment.
Isn't it redundant to say
that unemployment
is persistent and long-term?
Not quite.
What we have in mind
is when a large share
of the unemployed have been
unemployed for a long time,
and this has been true
for many years.
Consider the following data
from some leading
European economies
and the United States.
In each case the average
unemployment rate
in the European economies
between 1980 and 2004
was higher
than in the United States,
sometimes markedly so.
In Italy and France,
unemployment rates
have hovered around 10%
for several decades,
while Spain has had long spans
of unemployment near 20%.
Now look at the fraction
of the unemployed
who are unemployed
for more than a year.
In most of these economies,
between 40 to 50%
of the unemployed
were long-term unemployed,
compared to the United States
at just 12.7%.
In the United States,
the fraction of the unemployed
who were long-term --
it did shoot up
in the 2008, 2009 recession,
but has since fallen.
This persistent,
long-term unemployment
is structural unemployment.
One of the causes
of structural unemployment is large,
quick-hitting
and relatively permanent shocks
that change the number,
location, and types of jobs.
The 1970s oil shocks,
the opening of trade
with China in the 1990s,
or the rapid rise of the internet
would all be examples.
It can take time to adjust
to these kinds of big changes
in the economy.
These shocks, however,
they've hit both
the United States and Europe.
So why is structural unemployment
a worse problem in Europe?
The most likely answer is
that European labor regulations
have increased
structural unemployment,
in part by making it more difficult
to respond to shocks.
In the United States, for example,
the most basic employment law
is the At-Will Doctrine,
which says
that an employee can quit
and an employer can fire
at any time and for any reason.
Now there are
many exceptions to the law.
Employers cannot fire due to race,
religion, and sex, for example.
And, at-will employment
can be changed by contract.
Nevertheless,
at-will employment remains
the default U.S. employment law.
The situation in Europe,
in contrast,
is often very different.
In Portugal, for example,
the constitution makes
at-will employment illegal.
Dismissing a worker instead
requires “just cause.”
Now, that may seem
like a good thing.
Who could object to just cause?
But in practice, what this means
is that dismissing a worker
in Portugal requires a complex
and often lengthy process
that requires union
and government approval.
Because it's difficult
to fire workers in these countries,
employers are also
reluctant to hire.
Imagine how hard it would be
to get a date
if every date required marriage.
In the same way,
it's more difficult to get a job
when every job requires
a long-term commitment
from the employer.
Let's look at some data at
how these labor market regulations
affect unemployment.
On the horizontal axis, we'll put
the Rigidity of Employment Index,
which the World Bank calculates
to summarize hiring and firing costs
and how easy it is for a firm
to adjust hours of work.
On the vertical axis,
we have the percentage
of the unemployed
that are unemployed
for long periods of time.
You can see a clear trend.
The share of long-term
unemployment increases
with greater labor market rigidity.
European labor law also differs
from American law
in another respect.
European unemployment benefits
are typically much more generous
than American benefits.
In the United States, for example,
unemployment insurance
might pay, say 30%
of what a worker
was earning in their job.
It's not that much.
In Sweden, Portugal, or Spain,
a typical worker would get
at least twice that much.
Now, a worker who's being paid
only 30% of his
or her previous wage --
they're going to be much more
eager to find a new job
than a worker who is being
paid 60% of their previous wage.
Now that's not necessarily
a bad thing.
Maybe it gives workers time
to find better jobs,
but it does mean that unemployment
rates tend to be higher
and are longer-lasting in Europe
than in the United States.
The European economies,
because of these issues --
they've been trying to move towards
more flexible labor markets
since the 1990s,
but the process
is slow and difficult.
We can illustrate why
with, "A Tale of Two Riots."
In November of 2005,
angry, predominantly immigrant
and minority youth, rioted in Paris.
The riots were triggered
by accusations of police brutality,
but they also reflected
underlying problems
in the labor market,
most especially that 30%
of the immigrant youth
were unemployed.
French firms were reluctant
to hire young minority workers.
Perhaps in some cases
because of outright discrimination,
but also because young workers
are especially risky.
Labor law
made it difficult to fire
and so firms
were reluctant to hire.
Once again, who wants
to go out on a blind date
if a date means forever?
Now the French government
was aware of these problems
and they proposed
to change labor law,
so that employment would be at-will,
but just for workers
under the age of 26.
Such a law would have been good
for immigrant youth,
but the idea that
they might be fired at will --
that offended
more elite French students.
So these elite students, well,
they started riots of their own.
They took over university offices,
they shut down universities
all across France,
and they were joined by hundreds
of thousands of people
who protested the proposed law.
There were numerous clashes
between the police
and the protestors.
The government backed down.
"The Tale of Two Riots" illustrates
how restrictive labor law can
create two very different groups:
the Insiders --
who for the most part
enjoy the protection
of long-term stable employment,
and the Outsiders --
the people who are frozen
out of the regular labor market.
They end up having
high unemployment rates,
and only intermittent
and temporary employment.
Dealing with
structural unemployment
and creating a labor market
that's open to all workers --
this is one
of the most serious issues
facing some of the economies
in the European Union.
Okay. In our next video,
we're going to turn
to another type of unemployment:
cyclical unemployment.
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