Academic journal article Brookings Papers on Economic Activity

Amerisclerosis? the Puzzle of Rising U.S. Unemployment Persistence

Academic journal article Brookings Papers on Economic Activity

Amerisclerosis? the Puzzle of Rising U.S. Unemployment Persistence

Article excerpt

ABSTRACT The persistence of U.S. unemployment has risen with each of the last three recessions, raising the specter that future U.S. recessions might look more like the "Eurosclerosis" experience of the 1980s than like the traditional V-shaped recoveries of the past. We revisit several explanations for this rising persistence, decomposing them into three possible sources: business cycle fluctuations, changing policy responses, and propagation mechanisms. First, we find that financial shocks do not systematically lead to more persistent unemployment than monetary policy shocks, casting doubt on the hypothesis that different drivers of business cycles are the primary explanation. Second, we find that changing monetary and fiscal policy responses account for approximately one-third of the rise in unemployment persistence. Third, after examining three propagation mechanisms we find that jointly they cannot account for any rising persistence of unemployment. The three propagation mechanisms we focus on--declining labor mobility, changing age structures, and the decline in trust among Americans--are consistent with four other cyclical patterns that have evolved since the early 1980s: a rising cyclicality in long-term unemployment, lower regional convergence after downturns, rising cyclicality in disability claims, and missing disinflation. We exploit regional variation in labor market outcomes across Western Europe and North America during 1970-91 to assess the predictive capacity of each propagation mechanism for unemployment persistence. In summary, two-thirds of the rise in unemployment persistence is unexplained.

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When the U.S. unemployment rate surged by four percentage points between 1979 and 1983 in the midst of what was then the most severe slump since the Great Depression, Western European countries experienced, on average, an almost identical rise in unemployment. But whereas by 1987 rapid job growth in the United States had offset all of this rise in joblessness, the average unemployment rate among West European countries declined only half a percentage point over the same time period. Thirty years later, and nearly six years after the start of the 2007-09 Great Recession, the recovery in the U.S. labor market is a pale shadow of the U.S. experience in the early 1980s. From its peak of 10 percent in October 2009, the United States has seen its unemployment rate fall only halfway back to its prerecession levels in the four years since, placing it midway between the pace of recovery of the United States and Western Europe in the early 1980s.

But while the pace of the U.S. job market recovery looks downright anemic relative to the rapid rebound experienced after the Volcker recessions of the early 1980s or prior recessions in the post-World War II era, the degree of persistence in unemployment since the Great Recession only modestly exceeds that following the 2001 recession, which in turn modestly exceeded that of the 1990 recession. From this perspective, we observe a gradual trend of increasingly weak recoveries over the last three recessions that contrasts sharply with the previous U.S. experience. If this trend reflects more than a historical coincidence and is to continue, future U.S. recessions are likely to display extended periods of depressed labor markets that will increasingly resemble the experience of many Western European countries in the 1980s.

To support the notion that there may have been common factors at work in the 1990, 2001, and 2007 recessions, we document four related properties of the Great Recession that are puzzling in comparison to historical (pre-1990) recessions but are not unusual when compared with the 1990 and 2001 recessions. They are (i) missing disinflation--given the historical link between inflation and unemployment, one would have expected inflation to fall much more in the Great Recession than it actually did; (ii) the unusually large share of long-term unemployed; (iii) the slow rate of convergence in regional labor markets; and (iv) the rise in disability claims during the Great Recession. …

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