More than a year after the United States returned to growth, the unemployment rate remains high, and even crept up again to 9.6 percent in August. Though such persistently high rates are causing distress among workers and policy makers, they are not unique to this recession. Still, the number of individuals affected by unemployment is higher than at any other point in the postwar period, as is the rate of long-term unemployment. With construction collapsing and likely to remain depressed and other large shifts occurring between industries, a significant component of today’s unemployment is structural, and therefore unlikely to respond quickly to a cyclical recovery.
Lagging, As Usual
Though U.S. GDP returned to growth in the third quarter of 2009, the unemployment rate remains elevated. The U.S. economy has failed to reach “full employment”—an unemployment rate of about 5 percent—and has exceeded its own twenty-year pre-crisis unemployment rate average of 5.4 percent for 27 consecutive months. According to the Congressional Budget Office, for example, the labor market is not expected to return to full employment until 2015—more than seven years after the crisis began and close to six years after its likely trough.1
Dire as this sounds, such persistent unemployment is not unusual. Unemployment is a lagging indicator and the labor market has taken even longer to regain full employment following recessions several times before.
The persistence has grown worse in recent recessions. After two of the three most recent troughs—November 1982 and March 1991—unemployment did not fall back to 5 percent for 76 months and 74 months, respectively. Following the two most recent recessions—March 1991 and November 2001—unemployment took longer to fall consecutively (i.e., for two months in a row) than it has during the current downturn and was further above its trough level at this point in the economic recovery.
Rise and Level More Alarming
While the persistence of unemployment is not unique to this crisis, the number of people affected is unmatched in the postwar period. In August, 14.9 million people were unemployed. That number peaked at 15.6 million people in October 2009, compared to the previous post-war record of 12.1 million people in December 1982.
The number of jobs lost from December 2007 to the end of 2009—8.4 million—represents the largest drop in both number and percentage terms since World War II. In addition, the rise in unemployment has been even sharper than the dramatic drop in output would have predicted.
Based on a recent Congressional Research Service (CRS) estimate of the relationship between output growth and the unemployment rate, the 2009 GDP contraction of 2.6 percent should have implied a 2.4 percent rise in unemployment2—significantly lower than the actual 3.5 percent increase in 2009. The IMF similarly finds that unemployment was more sensitive to the drop in output during this crisis.3 And pre-crisis job growth was not responsible for the high numbers: In the twelve months leading up to the recession’s pre-crisis peak, the U.S. economy created fewer jobs than it did in the lead-up to seven of the ten most recent pre-crisis peaks.
Relative to the GDP drop, the U.S. labor market’s response has also been more extreme than that of many other countries, including Japan, Mexico, the Netherlands, and the Slovak Republic. The OECD and the IMF attribute this mainly to differences in the shocks experienced: while the United States was responding to collapses in its housing and financial markets, the other countries were coping mainly with plummeting exports. In Germany, a government scheme in support of shorter working hours in lieu of outright layoffs helped keep unemployment almost unchanged.
The flipside of this increased sensitivity is the remarkable performance of U.S. productivity, which outdid both its own past performance and that of other major economies more recently.4 This is likely to be good news going forward, as it positions U.S. companies—who have seen profits rising (q/q) since the first quarter of 2009—to hire more workers once demand recovers.
A Structural Problem In Part
A significant part of the rise in unemployment appears to be structural: unemployed workers—who are often leaving industries, such as construction, that are contracting permanently—do not have the skills demanded in growing industries. This implies that unemployment may not react as closely as usual to increases in demand.
The long-term unemployment rate—which measures the share of the labor force that has been unemployed for 27 weeks or more—has risen sharply since the Great Recession began, reaching 4 percent in August. In other words, new people have not been constantly entering and exiting unemployment; rather, a set population has suffered from persistent job loss. More than four out of every ten unemployed people have been jobless for more than six months—by far the highest proportion in the postwar period.
This may lead workers to become discouraged and stop looking for jobs. The size of the labor force has already decreased more over the course of this recession than in any recent downturn. On average, the labor force has grown over the course of recessions since World War II. This time, the labor force fell by approximately 0.5 percent.
The surge in long-term unemployment is also likely to have serious implications for human capital, as the skills of the long-term unemployed fade or become outdated. A large skills mismatch already appears to have emerged. In fact, the Atlanta Fed estimates that 65 percent of the job adjustments during and after the Great Recession reflect sectoral shifts—compared to 57 percent in the 1991 recession and 79 percent in the 2001 downturn—with contraction in industries like telecommunications, publishing, broadcasting, and construction and expansion in the federal government, health care, and social services. Kierkegaard similarly finds that the gains have been narrowly focused to education, healthcare, leisure, and hospitality services.
Recent trends in the Beveridge Curve—a measure of structural unemployment, which traces the ratio of unemployed workers to job vacancies—similarly points to a rise in structural unemployment: analysts find that the ratio of unemployed to vacancies has increased.
Weak housing markets could also help explain the Beveridge Curve’s outward shift, as they may keep unemployed workers tied to one location. In fact, the size of the labor force has changed little in each region, implying that few people have moved to find better job prospects elsewhere. However, there is evidence that the skills mismatch may be the larger culprit, as the unemployment rate has actually increased most in areas where job openings have increased the most, and fallen in the Midwest, where job openings have increased the least.
Promoting growth is by far the most powerful lever available to policy makers to lower the unemployment rate. The CRS estimates that, on current productivity and labor force trends, GDP growth must exceed 3.5 percent for unemployment to fall. Accordingly, monetary policy must remain stimulative and the withdrawal of fiscal stimulus should be delayed.
Given the significant structural aspect of unemployment, however, broad growth enhancing policy is not enough, and more attention should be paid to mitigating skill and location mismatches. Appropriate responses could range from worker-retraining programs to relocation subsidies and other support measures for those attempting to sell their homes.
In the meantime, policy makers must continue to help the long-term unemployed. Congress should not allow concerns about deficit reduction to stop support for the more than 6.2 million long-term unemployed who are no longer eligible for regular benefits—as it threatened to do in July.
Vera Eidelman is the managing editor of the International Economic Bulletin.
1. The NBER has not yet announced an official trough for the Great Recession, but the CBO notes that most observers use June 2009 as the end-date. The St. Louis Fed estimates that July 2009 marked the business cycle trough.
2. The report found that, since 1949, a real GDP growth rate of 3.5 percent has been associated with a stable unemployment rate; deviations of 1 percentage point in GDP growth have been associated with 0.4 percentage point changes in the unemployment rate. Based on this relationship, the 2.6 percent GDP drop in 2009 would imply a 2.4 percent increase in the unemployment rate.
3. According to the IMF, the elasticity of unemployment with respect to GDP growth rose from a 20-year pre-crisis average of 0.26 to 25-year high of 0.32 in 2009.
4. In 2009, U.S. output per hour increased by 3.5 percent (y/y), significantly faster than the 20-year pre-crisis average of 2.2 percent. And, out of a sample of seventeen major economies taken by the Bureau of Labor Statistics (BLS), the United States outpaced or matched every one in productivity growth in 2008 (the last year for which data is available).