You’re description of career and education decisions as long-term and hard to change suddenly is a good description of how individuals usually make career choices. However, in response to a massive shock to an industry, career changes behave nothing like you’ve described them. I don’t think the 26,000 employees of Lehman brothers made their career choices like that. Maybe deciding what their next career is will be a long-term and gradual decision, but in the meantime their “decision” not to be in finance has been made for them, and quickly so. Evidence of a fast structural shift is also seen in the fact that 40% of Harvard graduates entered into finance and consulting careers in 2008 and 20% did in 2009.

Regarding your comparison to the 90s, there is no reason to expect that labor markets would shift as quickly in response to a positive structural change as they would to negative structural change. We don’t expect a bubble to deflate as slowly as it inflated either.

And to whether or not structural changes correlate with the business cycle; like I said, I see no reason why a theory has to explain every recession in order to be a good theory for this recession.

These factors just aren’t strong enough to explain most of what happens during recessions and depressions. The point I was trying to make in my earlier comment is that career and education decisions are long term, hard to change suddenly, and depend on many factors other than short term economic conditions.

Recessions and depressions just correlate very poorly with technological and structural changes in the economy relative to how well they correlate with changes in monetary policy and demand based factors. The logic and evidence for these factors being much greater is extremely strong.

To see a nice layout of this evidence I recommend Nobel Prize winning economist Paul Krugman’s book, “The Return of Depression Economics and the Crisis of 2008″.

The event was the sudden and unexpected change in the expected long-run equilibrium size of the finance and real estate industries. Suddenly people realized there are going to be a lot less finance and realtor jobs for the foreseeable future. A change in expectations of that scale didn’t occur in the previous 18 months, or the 18 months before that. In addition I would point the the sudden and sever change in people’s wealth, which would affect career choices, both in terms of retirement decisions and in terms of trading off current consumption and leisure.

This does not need to explain every recession in order to be a good theory for this recession.

What was this huge cultural event that occurred in the last 18 months that caused this mass soul searching about what people majored in in college and what career they chose, that didn’t occur in the previous 18 months, or the 18 months before that, or before that. Did the last big mass career and major soul searching occur in the early 90s recession? How did I miss that?

I agree the empirical prediction is clear, and I think the literature on this says that unemployment is responsive to duration but not (or only slightly) to level of benefits. That does suggest, at the very least, a more complicated model. What that model looks like, I don’t know.

In a world with adjustment costs you can have the new growth industries growing their capital base slowly, which could just be a standard RBC model with adjustment costs. This would explain why adjustment is protracted.

RBC people would probably say money appears to matter because it is an output from the banking industry, which contracts like all the other industries in response to shocks. Obviously that’s a terrible theory that nobody should beleive… but it is a theory.