Academic journal article Current Politics and Economics of the United States, Canada and Mexico

The Increase in Unemployment since 2007: Is It Cyclical or Structural?*

Academic journal article Current Politics and Economics of the United States, Canada and Mexico

The Increase in Unemployment since 2007: Is It Cyclical or Structural?*

Article excerpt

INTRODUCTION

During the past few years, economists have been debating how much of the increase in unemployment since the start of the 2007-2009 recession is due to reduced demand for goods and services compared with compositional changes entailing worker reallocation across industries and areas.1 In other words, how much of the increase in the official unemployment rate from 5.0% at the recession's outset in December 2007 to a peak of 10.0% in October 2009 was cyclical unemployment and how much was structural unemployment?

Distinguishing cyclical from structural unemployment is more than an academic exercise. Their relative contribution to the increase in the unemployment rate since 2007 has different implications for the pace at which the economy can grow without spurring inflation and for which public policies are most appropriate to lower an unemployment rate that remains elevated long after the latest recession's end in June 2009.

Many workers who became unemployed during the 2007-2009 recession are expected to return to jobs in their former industries as demand for the goods and services they previously produced grows during the recovery phase of the business cycle. Fiscal and monetary policies often have been used to jump-start aggregate demand and job growth for the cyclically unemployed. In response to the latest recession, for example, recent Congresses enacted multiple measures to stimulate demand and promote job creation while the Federal Reserve (Fed) undertook various strategies to mitigate the financial crisis that coincided with the recession and to stimulate economic activity.2 If the increase in unemployment is largely due to the sluggish pace of output growth since the recession's end, then economic theory suggests that fiscal and monetary stimulus would be suitable strategies for lowering the unemployment rate from its still-elevated average of 8.1% in 2012.

Those workers who permanently lost their jobs during the 2007-2009 recession are expected to experience a longer spell of unemployment than those temporarily laid off until product demand revives in their former sectors of employment. The duration of job losers' unemployment may be further lengthened if the skills they possess do not match the skills required by jobs in growing sectors or if they live in areas different from those experiencing job growth. To overcome skill mismatch for example, displaced workers may require retraining or additional formal education. Congress recognized that different public policies are appropriate for helping structurally unemployed workers return to economically productive activities when it included training provisions among the countercyclical measures in the American Recovery and Reinvestment Act, for example.3

Rather than persisting in their search for jobs, some structurally unemployed workers may drop out of the labor force, thereby reducing the supply of labor and the capacity of the economy to grow in the long run.4 A smaller labor force also reduces income tax payments and imposes additional costs on society. For example, because older workers, the partially disabled and less educated are among those most likely to stop participating in the labor force, early claiming of Society Security retirement benefits and entering the Social Security Disability Income program could increase.5

Given the different implications of cyclical and structural unemployment for policymakers, this report distinguishes between the relative magnitude of the two in recent years. Before conducting this analysis, the report defines a few concepts that will help the reader navigate the remainder of the report.

A FEW CONCEPTS BRIEFLY EXPLAINED

Economists often break down unemployment into three types: frictional, structural, and cyclical.

* Frictional unemployment arises from the ever-present movement of people into and out of jobs. Examples include the unemployment of college graduates while searching for their first jobs, of family caregivers returning to the labor force, and of workers who quit jobs before having found new ones. …

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