Unemployment: Structural vs. Cyclical – and Globalization's Adverse Impact

Abstract

The U.S. economy continues to be characterized by a persistently-high rate of unemployment, with at least another three years before attainment of the pre-recession unemployment rate.

Six significant structural trends are identified and their impacts discerned.

The pernicious impact of globalization on U.S. employees, as manifested by the post-2000 business practices of America’s multinational corporations (MNCs), has seen multinationals shifting and growing their workforces overseas. Between 1999 and 2008, U.S. non-bank MNCs cut their domestic employment by 1.9 million while increasing their foreign-based employment by 2.4 million. After a decade, it is apparent globalization has yet to come full circle and bestow its gains to American workers. Offshoring by U.S. companies is also having a deleterious effect on the level of domestic employment, particularly in manufacturing and data processing.

Advances in technology are serving to replace domestic employees with software or lower-paid foreign-based workers. In 2000-08, domestic spending on capital expenditures by U.S. MNCs grew at an annual rate of 1.1 percent while their foreign-based affiliates invested at an annual rate of 6.2 percent.

A need for more highly-educated employees has manifested itself by consistently-favorable wage patterns. The low levels of monthly job creation and a declining labor force participation rates, particularly for prime-age men, since the turn of the century left workers vulnerable to the harshest post-World War II recession. The decreasing participation rate after 2000 may also reflect harmful impacts of globalization, with discouraged laid-off U.S. workers no longer looking for jobs. Over 23 million people – 50 percent of the increase in the U.S. population between 2000 and 2009 – were classified by the Bureau of Labor Statistics as “not in the labor force”. And the detrimental effect of long-term unemployment is a structural impediment to becoming well-positioned to compete for available jobs.

The six structural factors – globalization, technological advances, the need for a highly-educated and skilled workforce, declines in the labor force participation rates, particularly for prime-age men, the relatively-low levels of job creation and the effects of long-term unemployment – seem to be currently dominated by cyclical causes. However, if unemployment rates remain elevated for an extended period, structural causes of unemployment will likely predominate.

Keywords: unemployment, structural, cyclical, globalization, offshoring, value added, technological advances, jobless recovery, labor force participation rate, real GDP growth, productivity, manufacturing, education

JEL Classification: E24, E32, E65, I22, J64, D24, I21, J21