Magazine article Economic Trends

What's Up with the Unemployment Rate?

Magazine article Economic Trends

What's Up with the Unemployment Rate?

Article excerpt

The unemployment rate jumped back to 9 percent in April, after declining a full 1 percentage point between November 2010 and March. Both the decline and the increase came as a surprise to many. Though signs of a recovery had appeared in the aggregate economy as early as the second quarter of 2009, the unemployment rate had stayed persistently high, above 9 percent, for more than 20 months. Then over the course of four months, the rate unexpectedly fell 1 percentage point, reflecting both an increase in household employment and a reduction in labor force participation. Most recently, the rate jumped up by 0.2 percentage point in April. Hence, over the past five months employment (as measured in the Bureau of Labor Statistics household survey) has increased by close to 800,000, while the number of unemployed workers has declined by about 1.3 million.

In some ways, these ups and downs should not be surprising even this far into the recovery. We would expect unemployment to go down as the economy recovers and firms start to create jobs. On the other hand, the number of unemployed workers looking for a job might also grow, if previously discouraged workers or those not looking for work start coming back to the labor force as the prospect of finding a job improves. These two channels can play against each other in determining the unemployment rate, and they certainly have in this recovery. Which channel will dominate over the next few months is an open question.

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In this article we focus on some of the dynamics acting on those channels. Specifically, we consider the behavior of workers who have been unemployed for a long time and more generally, the gross flows of the entire pool of unemployed workers.

What is unique about this recession is that we have a very large pool of long-term unemployed workers. We would expect that workers who are unemployed for longer periods might lose their contacts (maybe even skills) and might have a harder time finding a job than those who go through shorter spells of unemployment.

The number of workers unemployed for fewer than 5 weeks has essentially returned to pre-recession levels. While this group has been successful in finding employment (or choosing to move out of the labor force) as the recovery continues, the same can't be said for those unemployed for longer periods. The pool of individuals unemployed for 15 to 26 weeks has made some progress in returning to pre-recession levels, but if this expansion is like the last one, this pool could retain a larger number of individuals throughout the recovery.

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The number of long-term unemployed workers (27 weeks or more) is exceptionally large right now; 22 months into the recovery, it has more than tripled from pre-recession levels. This group tends to have the most persistent unemployment and take the longest to return to trend levels. In the previous expansion, the number of long-term unemployed workers, like the number of those unemployed 15 to 26 weeks, never returned to pre-recession levels.

Gross flows data can show us the frequency with which workers are transitioning from unemployment to other states, such as employment or inactivity; that is, we see the fraction of workers unemployed in the previous month who found jobs in the current month (moved into employment), stay unemployed, or moved out of the labor force. …

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