Cyclical or structural?

Many issues in today’s economy are blamed on the recession. This means solutions focus on actions that would speed the recovery from the recession. But, says N.C. State University economist Mike Walden, this focus might be misguided.

“It goes back to, ‘What’s the cause of the problem?’ And, in economics, particularly macroeconomics, we say that there can be two causes to a problem: One is cyclical. That is to say, … the problem is caused by the recession. For example, we had a big upswing … in unemployment. Obviously, a lot of that was due to the recession. But the unemployment rate has come down — not as low as many would like. Part of that is due to the economic recovery.

“So, if that’s the problem, then of course dealing with the recession is the issue. That might mean that you want to have a tax cut or you want to have more government spending.

“But there could be another cause of the problem we’re looking at. It could be what we call a structural problem. These are problems based on something much more fundamental than a recession or a recovery. A good example here is the fall in the labor-force participation rate. Some of that is due to the fact that we have aging baby boomers who are retiring. We also have young people who are staying in school longer. That’s pushing the employment rate down.

“However, we also have people who simply don’t have the right skills; they can’t get a job. That’s not necessarily recession related. That’s related to a structural problem of training, education, et cetera.

“So we really have to identify the root cause of a problem before we recommend solutions.”