Magazine article Regional Economist

Unemployment by Industry: Duration Must Be Considered, Too

Magazine article Regional Economist

Unemployment by Industry: Duration Must Be Considered, Too

Article excerpt

To better understand unemployment in key industries, not only the unemployment rate but the duration of unemployment in those industries needs to be examined. Focusing only on the former could lead to misguided efforts to assist the unemployed. This article investigates the behavior of both the unemployment rate and the duration of unemployment across industries from 2005 through 2014, a period that includes the Great Recession (2007-09).

Strong Co-movement Trend

We obtained industry-level data on unemployment rates, unemployment duration and the total number of unemployed from the Bureau of Labor Statistics for 12 major industries.1 Figure 1 shows that the unemployment rates across the six industries with the largest average number of unemployed move together over time. The unemployment rates rose sharply for all six after the recession began in 2007 and gradually began to fall after 2010. Although the rates moved together, some industries were hit harder than others. For example, the unemployment rates of the manufacturing sector and of the leisure and hospitality sector rose more than the rate for the education and health services sector after the beginning of the recession; this shows that there is some heterogeneity in the rates despite the obvious co-movement.

Similarly, the duration of unemployment across these industries shares this co-movement effect. Figure 2 plots the mean unemployment duration for the same six industries. The durations were relatively low before the recession and sharply increased during the recession. As the economy continued its recovery, they gradually came down, starting in 2012.

In terms of heterogeneity across industries, some industries tended to have shorter unemployment spells than others. These differences were generally persistent throughout the sample period. One distinguishing feature of unemployment duration is its lagged response to the business cycle. Comparing Figures 1 and 2, duration reached its peak across all industries later than the unemployment rate. This lag persists today, with the newest data showing that the various unemployment rates have returned to their precrisis levels while the various unemployment durations are still far above where they were in 2007. It will be interesting to see whether the durations will revert eventually.

Negative Correlation

It is reasonable to suspect that there should be a positive relationship between the unemployment rate and unemployment duration. A higher-than-average unemployment rate in a specific industry may indicate that this industry is experiencing an economic hardship. Those workers laid offfrom that industry might face limited job opportunities, thereby lengthening their time spent unemployed. However, the data show that the average unemployment rate for each industry from 2005 to 2014 and the average mean duration for each industry across the same time period exhibit a negative relationship across industries (correlation coefficient of -0.67).

Figure 3 demonstrates this result. Each circle represents one industry, and the size of the circle represents the number unemployed in that industry. Clearly, the relationship between the unemployment rate and duration is negative: An industry with a higher unemployment rate tends to have a shorter unemployment duration. Take the construction sector and the leisure and hospitality sector as examples. Both industries have a higher than average unemployment rate from 2005 to 2014, yet their unemployment durations are two of the lowest among all industries.

However, the negative relationship is not perfect. An exception is the education and health services sector, which has both a relatively low unemployment rate and a relatively short duration. …

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