Flash Point: Why High Unemployment Is Structural

We have argued in the past that the current high unemployment rate in the West is structural, not cyclical (Signs of a Structural Change in the US Economy). We have also supported research that suggests that the high level of debt will depress economic growth for a decade or two (The Policy of Doom). In effect, since debt is incurred to increase current spending, while the debt is active (An Insight into the Impact of Debt on Economic Growth), future disposable income and hence future spending is depressed.

In short, debt has these effects:

  • Future income is moved into the present.
  • Future spending is moved into the present.
  • Future economic activity is moved into the present.

The part we had missed until now is this:

  • Future employment is moved into the present.

The massive credit bubble created over the last two decades created economic activity in that time frame that would have occurred in the future. The employment rate during that period would have been elevated by this elevated activity and future employment will be depressed as a result of unavailable economic activity.

On the issue of whether unemployment is cyclical or structural, the answer becomes both. In terms of the credit super-cycle, it is cyclical (discounting other events in the labour market) but in terms of the business cycle which is much shorter, it is structural.

It’s wonderfully simple!

Update: 20120127

Zero Hedge posts an article, The Stock Market Is Back To December 2007 Levels; Here Is What Isn’t, that graphically demonstrates how employment is not coming back as the policy wonks expect.

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