The Unassuming Economist

America’s current unemployment crisis is predominately the result of a pronounced dip in the business cycle, according to a new paper by economists at the International Monetary Fund. But, structural factors, like shortages of highly-skilled laborers, is keeping the jobless rate high, too, the paper finds. Read the rest of Huffington Post’s story.

My new paper on cyclical and structural sources of unemployment provides cross-country evidence on the relative importance of cyclical and structural factors in explaining unemployment, including the sharp rise in U.S. long-term unemployment during the Great Recession of 2007-09. About 75% of the forecast error variance of unemployment is accounted for by cyclical factors-real GDP changes (?Okun‘s Law?), monetary and fiscal policies, and the uncertainty effects emphasized by Bloom (2009). Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25 percent. For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession.

Menzie Chinn provides a nice summary of the Madison conference on long term unemployment.

Nobody needs to remind Jeanne Hime what hard times look like. After 30 years as a union electrician, Hime watched her hometown manufacturing plant close down, disrupting the lives of hundreds of working families in Darke County, Ohio. “These weren’t people who could just pick up and find a job somewhere else,” says Hime. “They had lifetime roots in the community and didn’t want to leave.” Now retired and living in Mount Horeb, Hime isn’t confident the good factory jobs will ever return.  And she takes exception to those who dismiss the current unemployment situation as simply a cyclical turn of the economy. “People like me have been burned too many times,” she says. “Why should they believe anything is going to change?” Hime’s comments Thursday were directed at a panel of national economic researchers on the University of Wisconsin-Madison  campus during a conference titled “Long-Term Unemployment in Industrial Countries: Causes, Consequences and Policy Responses.” Co-hosted by the La Follette School of Public Affairs, the discussion centered on whether the surge in joblessness both in the  U.S. and Europe is the result of the recession or a sign of a deeper structural problem. Although the recession — defined by economists as a drop in gross domestic product over two consecutive quarters — has officially ended, the jobs recovery has been tepid at best. While a 5 percent unemployment rate is considered normal, unemployment in the U.S. remains near 9 percent. It’s even  higher in Spain (20.4%), Ireland (14.6%) and Greece (14.2%), countries all hit hard by the global financial crisis. The problem is that the longer people stay out of work, the harder it is for them to find a job. For older employees, their skills  deteriorate and if they do return to the workforce it’s usually at much lower pay. “The longer you fail to address cyclical unemployment the more it becomes structural,” says Prakash Loungani, an advisor to the International Monetary Fund in Washington D.C. Read full story here. 

I’m presenting some new work on unemployment at a conference at the University of Wisconsin this morning. I provide cross-country evidence on the relative importance of cyclical and structural factors in explaining unemployment, including the sharp rise in U.S. long-term unemployment during the Great Recession of 2007-09. About 75% of unemployment is accounted for by cyclical factors-real GDP changes (“Okun’s Law”), monetary and fiscal policies, and the uncertainty effects emphasized by Nick Bloom (Econometrica, 2009). Structural factors, which I measure using industry-level stock returns, account for the remaining 25 percent. For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession. Here’s my paper on cyclical and structural sources of unemployment and two related presentation slides (one and two).