Magazine article Economic Trends

Trend Unemployment and What It Says about Unemployment Patterns

Magazine article Economic Trends

Trend Unemployment and What It Says about Unemployment Patterns

Article excerpt

09.19.08

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The unemployment rate increased to 6.1 percent in September from 5.7 percent a month earlier. Just a few months ago, in May, the rate experienced another sharp rise, from 5.0 to 5.5 percent. A year ago, the unemployment rate was just 4.7 percent. Such movements in the unemployment rate are not unusual by any measure, and they have been studied for a long time. For the past 60 years, the unemployment rate has varied between 2.5 percent and 10.8, rising during recessions and falling during expansions. This pattern makes it what economists call a countercyclical variable. Typically, the rate rises sharply at the onset of a recession, but it usually takes a while for the rate to drop back down once the recession ends. These cyclical fluctuations in the unemployment rate are a robust feature of the data, and even though the timing of the ups and downs changes somewhat across different historical episodes, the clear countercyclical pattern tends to hold.

However, monthly fluctuations in the unemployment rate include a lot of cyclical movements that may be only temporary. Removing those cyclical elements can help to see the longer-term picture, and this we can do by smoothing the data to calculate the unemployment rate's trend. When we look at the trend along with the monthly data for the last two recessions and the recoveries that followed, we see that the trend increased slightly in both cases, but the unemployment rate stayed above the trend for more than two years. This view shows that it takes a while for the unemployment rate to return to its long-run trend after recessions, but once it gets there, it stays there for the rest of the expansion. The unemployment rate returns to its trend only when the expansion is long enough, like the two that preceded the 2001 recession.

One might expect the pattern just described to be different for various segments of the workforce, since workers' desire for employment or their employability can differ, depending on their age, gender, or education. For instance, older workers have always had lower unemployment rates than younger workers. Because older workers are arguably more attached to the labor force and more experienced at their jobs, they are less likely to be let go in a downturn and more likely to be hired in a boom. …

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