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Tuesday, May 3, 2011

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

Linda Levine
Specialist in Labor Economics

The unemployment rate has greatly increased since the onset of the recession in December 2007, when it measured 5.0%. The rate peaked at 10.1% in October 2009, four months after the recession’s official end. Almost two years into the economic recovery, the unemployment rate remains high (at just under 9.0%), and therefore remains of concern to policymakers.

Congress has used fiscal policy and the Federal Reserve Board has used monetary policy to jumpstart economic growth, that is, to put the economy on a path toward the level of demand for goods and services that preceded the 2007-2009 recession. Firms typically react to recessions by laying off workers, and the deeper the downturn in the business cycle, the greater the unemployment that results. Expansionary fiscal and monetary policies are commonly relied on to remedy what is known as cyclical unemployment.

The unemployment rate has not been as responsive as had been hoped to the countercyclical measures undertaken by Congress and the Federal Reserve Board in the past few years. As a result, some have suggested that an increase in another type of unemployment—referred to as structural unemployment—has accounted for much of the rise in the unemployment rate.

Structural unemployment develops for different reasons than cyclical unemployment, and is thought to respond to different policy measures. Structural unemployment results when jobseekers do not move quickly into vacant jobs. Obstacles that appear to lengthen the spell of unemployment, that is, to prolong the period of job search, include mismatches between the skills or locations of jobless workers and the skills or locations of available jobs. Another impediment may be the composition of the unemployed, such as more workers whose connection to their former employers is permanently severed and fewer workers likely to be recalled from layoffs once business revives at their former employers. A third factor that may contribute to long-term unemployment is known as labor market institutions, such as unemployment benefit programs.

The measures recently enacted by Congress have chiefly focused on alleviating cyclical rather than structural unemployment. To the extent that skill mismatch or the Emergency Unemployment Compensation (EUC) program has contributed to the current high unemployment rate, Members of Congress may consider promoting the education and training of workers who lost jobs in such hard-hit industries as home building and allowing the EUC program to lapse as scheduled in 2012. To the extent that the increase in unemployment is the result of slow economic growth since the recession’s end, however, policymakers may consider additional countercyclical policy measures.

This report assesses the relative magnitudes of cyclical and structural unemployment as they have different implications for policymakers. An analysis of changes between 2007 and 2010 in a variety of labor market indicators across industries and areas finds patterns that strongly suggest most of the 5 percentage point increase in the U.S. unemployment rate is cyclical, that is, due to depressed aggregate demand. Empirical studies suggest that, although structural unemployment has increased, it accounted for a minority of the rise in the unemployment rate since 2007: perhaps between 20% and 35%, or 1.0-1.75 percentage points out of 5 percentage points.

Date of Report: April 28, 2011
Number of Pages: 18
Order Number: R41785
Price: $29.95

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