The document discusses the high unemployment in the US and debates the causes. It considers whether the problem is low aggregate demand or supply-side issues. While stimulus measures aimed at boosting demand helped prevent a worse downturn, continued government spending and regulatory uncertainty have increased household savings and made businesses reluctant to invest. A key factor prolonging unemployment is job losses in construction following the housing boom, which will be hard to replace and accounts for up to 3% of total unemployment. Rather than constantly boosting spending, a more sustainable approach is to retrain and reskill the unemployed.

1. [Viewpoint] The
U.S. unemployment challenge
The history of recent recessions suggests that we should not be surprised that the job recovery
is taking time.
January 11, 2011
Economics is all about demand and supply. Typically, the two are equal, and, if not, powerful
forces push them towards each other. But, with high and persistent levels of unemployment in
the United States, there is a real question about the nature of the problem: is aggregate
demand too low, or are there problems with supply?
President Barack Obama’s administration seems to think that the problem is one of demand. It
has passed stimulus measure after stimulus measure as it reduces taxes and increases transfers
and government spending in order to boost consumption and investment. The Federal Reserve
is of a similar mind, not only maintaining rock-bottom short-term interest rates, but also
embarking on an adventurous policy targeting long-term rates. Some progressive economists
want even more.
Why have these policies not worked thus far in bringing down unemployment, even though the
recovery is well under way? The progressive economist says that the stimulus worked, staving
off a much deeper recession - if not worse - but that the measures were too timid to generate a
robust recovery.
The conservative economist responds that it is precisely because the government has become
so free with taxpayers’ money that households, fearful of future taxes, are hunkering down and
increasing savings. Moreover, the increasingly activist government has left businesses uneasy
about future regulatory and tax measures, and thus reluctant to invest.
The truth probably lies somewhere in between. Government spending - especially on

2. unemployment benefits, aid to states, and some construction projects - probably helped avert a
more wrenching downturn, but continued to fuel red ink worries among households, which are
also trying to rebuild savings and reduce debt after a spending binge. The regulatory uncertainty
created in areas such as health care makes it difficult not only for the health-care industry to
make long-term investment decisions, but also for businesses to make long-term hires.
Nevertheless, before rushing to judgment about current policy, we should recognize the trend in
recent U.S. recoveries of slow job growth. From 1960 until 1991, recoveries from recessions in
the U.S. were typically rapid. From the trough of the recession, the economy recovered the lost
jobs in eight months on average. The recoveries from the recessions of 1991 and 2001 were very
different. For instance, in 2001 it took just one quarter for output to recover but 38 months for
jobs to come back.
Explanations abound. Some economists argue that, unlike past recessions - in which workers
were temporarily laid off from an industry only to be rehired as the recovery picked up - job
losses starting in 1991 were more permanent. Matters were exacerbated by firms’
postponement until a recession of hard choices about closing unviable plants and shedding
workers. As a result, unemployed workers had to find jobs in new industries, which took more
time and training.
Others suggest that the Internet has made it easier for firms to hire quickly. So, rather than hire
in a panic at the first sign of recovery - as they did in the past, for fear that they will be unable to
do so later and lose sales - firms today would rather ensure that the recovery is well established
before hiring. Hence also the growth in temporary hires today.
Regardless of what the right explanation is, the history of recent recessions suggests that we
should not be surprised that the job recovery is taking time. There is, however, an aspect of the
problem that is different this time: layoffs in construction. Therein lies an additional explanation
for tepid job growth, as well as a salutary lesson about policy.
In the last boom, construction jobs expanded significantly, with investment in housing as a share
of GDP increasing by 50 percent from 1997 to 2006. States that had the largest rise in
construction as a share of GDP in 2000-2006 tended to have the greatest contraction in that
industry in 2006-2009. These states also tended to have the largest rise in unemployment rates
between 2006 and 2009.

3. The unemployed comprise not only construction workers, but also ancillary workers, such as
real-estate brokers and bankers, as well as all those who work on houses, such as plumbers and
electricians. So the job losses extend far beyond those in the construction industry.
It is hard to believe that any increase in aggregate demand will boost the housing market which, remember, was buoyed by visions of steady price appreciation that few seem likely to
hold today - sufficiently to re-employ all these workers. This “structural” unemployment may
account for up to three percentage points of total unemployment. In other words, were it not
for construction, the U.S. unemployment rate would be 6.5 percent - a far healthier situation
than today.
Policymakers should remember that the housing boom was fueled by easy monetary policy,
which sought to expand job growth as the U.S. recovered from the last recession. Indeed, highschool graduation rates dropped in Las Vegas as people left school for readily available unskilled
construction jobs. Now those uneducated unemployed are experiencing more than three times
the unemployment rate of college graduates. It will be very hard for them to return to the
workforce.
Instead of constantly trying to boost spending and potentially creating problems for the future,
a more sustainable way to improve job growth is to facilitate the “re-skilling” of the
unemployed.
*The writer is a professor of finance at the Booth School of Business at the University of
Chicago.
By Raghuram Rajan
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