unemployment rate greatly increased after the onset of the latest recession in
December 2007, when it measured 5.0%. The rate peaked at 10.0% in October
2009, four months after the recession’s official end in June 2009. More
than three years into the recovery, the unemployment rate averaged 8.1% in
2012. Given its still elevated level, policymakers may 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 (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 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 used
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. 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 from pre-recession levels. These observers assert that
the rise in unemployment due to change in the structure of the economy represents
“a new normal” of elevated unemployment rates for years to come.
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 skill requirements 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
unemployment. To the extent that the still-high unemployment rate results
from the slow pace of output growth during the recovery, economic theory suggests
that fiscal and monetary stimulus would be suitable strategies for further
reducing joblessness. To the extent that structural factors have contributed
to the still-high unemployment rate, economic theory suggests measures such as promoting
the education and retraining of workers who permanently lost jobs in hard-hit industries
(e.g., home building) so that they can acquire the skills needed to obtain
employment in other industries.
This report assesses the relative magnitudes of cyclical and structural
unemployment as they 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 temporarily increased, it accounted for a minority of the rise in the
unemployment rate in recent years.
Date of Report: January 24, 2013
Number of Pages: 21 Order Number: R41785 Price: $29.95
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