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Tuesday, December 6, 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 latest 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 in June 2009. More than two years into recovery, the unemployment rate remains high at about 9.0%. As a result, policymakers continue to be concerned about how to spur economic growth and create jobs.

Over the past few years, Congress has used fiscal policy and the Federal Reserve Board (Fed) has used monetary policy 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 rise in unemployment that results. Expansionary fiscal and monetary policies commonly have been 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 Fed in the past few years. Consequently, 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 since 2007.

Structural unemployment develops for different reasons than cyclical unemployment. Structural unemployment results when jobseekers do not move quickly into vacant jobs. Obstacles that lengthen the spell of unemployment (i.e., 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 is the composition of the unemployed, such as more workers whose connection to their former employers is permanently severed (i.e., 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 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 still-high unemployment rate, Members 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 the slow pace of economic growth, policymakers may consider additional countercyclical measures.

This report assesses the relative magnitudes of cyclical and structural unemployment as they are thought to respond to different policy measures. An analysis of changes since 2007 in a variety of labor market indicators across industries and areas finds patterns that strongly suggest most of the increase in the U.S. unemployment rate is cyclical (i.e., due to depressed aggregate demand). Empirical studies suggest that, although structural unemployment has increased, it accounts for a minority of the rise in the unemployment rate in recent years: perhaps between 20% and 35%, or 1.0-1.75 percentage points out of 5 percentage points.

Date of Report: November 21, 2011
Number of Pages:
Order Number: R41
Price: $29.95

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