A Third Kind of Unemployment?

Economists typically think of unemployment as falling into two categories. There is \”cyclical\” unemployment, which is the unemployment that occurs because of a recession. And there is \”structural\” unemployment–sometimes called the \”natural rate of unemployment\” or the NAIRU for \”nonaccelerating inflation rate of unemployment.\” This is the rate of unemployment that would arise in a dynamic labor market even if there was no recession, as firms expand and contract and people move between jobs. The level of structural unemployment will be influenced by factors that influence the incentives of people to seek out jobs (like the costs of mobility between jobs and the structure of unemployment, welfare, and disability benefits) and the incentives of businesses to hire (including rules affecting the costs of business expansion, rules affecting what firms must provide to employees, and even rule affecting the costs of firing employees, if necessary, later on).

Inconveniently, the unemployment that the United States is currently experiencing doesn\’t fit neatly into either of the two conventional categories.

After all, the recession officially ended in June 2009, according to the Business Cycle Dating Committee of the National Bureau of Economic Research.  However, the unemployment rate has been above 8% since February 2009, and in a February 2012 report on \”Understanding and Responding to Persistently High Unemployment,\” the Congressional Budget Office is forecasting that it will remain above 8% until 2014.

In a conventional economic framework, it\’s not clear how to make sense \”cyclical\” unemployment that persists for four or five years after the recession is over. However, the CBO and other forecaster have been predicting all along that the unemployment rate will eventually drop as the aftereffects of the Great Recession wear off, and in that sense it doesn\’t seem like natural or structural unemployment, either.

It\’s not clear what to call this persistent jobless recovery unemployment. \”Lethargic\” unemployment? \”Sluggish\” unemployment? \”Torpid\” unemployment? \”Tar-pit\” unemployment?

However you label it, this this is now the third consecutive \”jobless recovery,\” where it has taken a substantial time after the end of the recession for unemployment rates to come back down. It used to be that unemployment rates peaked almost right at the end of the recession, and the steadily dropped. Here\’s a graph of unemployment rates from the ever-useful FRED website of the St. Louis Fed. Periods of recession are shaded.

For example, when the 1974-75 recession ended in March 1975, unemployment was 8.6%. It climbed just a bit higher, to 9% in May 1975, but then fell steadily and by May 1978 was at 5.9%. Or look at the aftermath of the \”back-to-back\” recessions of 1980-81 and 1982. When the recession ended in November 1982, the unemployment rate was also peaking at 10.8%. It then dropped steadily and was down to 7.2% by November 1984 and 5.9% by September 1987.

In the jobless recoveries since then, the pattern has been different. When the 1990-91 recession ended in March 1991, the unemployment rate was 6.8%. But the unemployment rate kept rising, peaking more than a year later at 7.8% in June 1992. it wasn\’t until August 1993, more than two years after the economy had resumed growing, that unemployment rates had fallen back to the 6.8% rate that prevailed at the official end of the recession.

A similar pattern arose after the 2001 recession. At the end of that recession in November 2001, the unemployment rate was 5.5%. But then the unemployment rate kept rising, peaking out at 6.3% in June 2003. It wasn\’t until July 2004 that unemployment rates declined back to the 5.5% that had prevailed at the end of the 2001 recession.

In the most recent recession, unemployment was at 9.5% in June 2009, when the Great Recession officially ended. The official unemployment rate peaked at 10% in October 2009, and has drifted down since then. But in this recovery, the unemployment rate is an underestimate of labor market woes, because the official unemployment rate only counts those who are \”in the labor force,\” meaning that they are out of work but looking for a job. Those who have given up looking, or who are working part-time but would like full-time work, aren\’t counted as unemployed. The last few years have seen a dramatic drop in the \”labor force participation rate,\” that is, the share of adults who are \”in the labor force.\” This rate rose substantially from the 1970s through the 1990s as a greater share of women entered the (paid) labor force. But with job prospects so poor, it has been dropping off. 

The February 2012 CBO report describes the disconnect from the official unemployment rate to a broader appraisal of the U.S. labor market this way: \”The rate of unemployment in the United States has exceeded 8 percent since February 2009, making the past three years the longest stretch of high unemployment in this country since the Great Depression. Moreover, the Congressional Budget Office (CBO) projects that the unemployment rate will remain above 8 percent until 2014. The official unemployment rate excludes those individuals who would like to work but have not searched
for a job in the past four weeks as well as those who are working part-time but would prefer full-time work; if those people were counted among the unemployed, the unemployment rate in January 2012 would have been about 15 percent.\”

Our public discussions of what to do about these persistently high rates of lethargic or torpic unemployment have been unfortunately locked into the two older categories of cyclical and structural unemployment.

For example, some argue that if only the federal government had enacted an extra $1 trillion or so in fiscal stimulus, probably backed by a Federal Reserve willing to carry out another \”quantitative easing\” by printing money to finance the Treasury bonds for this stimulus, then the economy and the unemployment rate would be recovering much more quickly. But the federal government is in the process of running its four largest annual deficits since World War II from 2009 to 2012. The Fed is planning to hold the benchmark federal funds interest rate near zero percent for six years (!), while also engaging in $2 trillion of quantitative easing. The amount of countercyclical macroeconomic policy has been massive, and I have a hard time believing that just another boost would have fixed everything.

While I in general supported the countercyclical macroeconomic policies taken during the Great Recession (with some reservations about the details), it seems to me that countercyclical macroeconomic policy is like taking aspirin when you have a bad case of flu–or if you prefer a more extreme metaphor when talking about an unemployment rate that may exceed 8% for 7-8 years, like an athlete taking a cortisone shot for an injury before playing in the big game. Such steps can be worth taking, and they can sometimes even modestly help the healing process, but they are palliative, not curative. Also, the CBO offers a reminder that while more fiscal stimulus could help the economy in the short-term, it will injure the economy over the long run unless it is counterbalanced by a way of holding down government debt over time.

\”Despite the near-term economic benefits, such actions would add to the already large projected budget deficits that would exist under current policies, either immediately or over time. Unless other actions were taken to reverse the accumulation of government debt, the nation’s output and people’s income would ultimately be lower than they otherwise would have been. To boost the economy in the near term while seeking to achieve long-term fiscal sustainability, a combination of policies would be required: changes in taxes and spending that would increase the deficit now but reduce it later in the decade.\”

But the standard policy agenda for dealing with structural unemployment doesn\’t seem particularly on-point just now, either. Sure, it would be useful to encourage mobility between jobs and to rethink how regulatory and other policies affect incentives to work and to hire. But while this kind of rethinking is always useful, it\’s not clear that it addresses the reality of high unemployment here and now.

We need a convincing theory of this third kind of unemployment–sluggish unemployment, tar-pit unemployment–and an associated sense of what policies are useful for addressing it. Firms as a group have high profits and strong cash reserves, but they are not seeing it as worthwhile to raise hiring substantially, preferring instead to focus on getting more productivity from the existing workforce. Are there ways to reduce the costs and risks that firms face when thinking about hiring? Many households are struggling with outsized debt burdens, including those who have mortgages that are larger than the value of their home. Are there policy levers to help them move past their debt burdens?

Long-term unemployment is very high. CBO writes: \”[T]he share of unemployed people looking
for work for more than six months—referred to as the long-term unemployed—topped 40 percent in December 2009 for the first time since 1948, when such data began to be collected; it has remained above that level ever since.\” What do we know about getting the long-term unemployed back into the labor force?  Are there ways to encourage greater mobility of people between jobs, perhaps by spreading more information about job opportunities, making it easier for employers to verify skills of potential employees, or encouraging both greater geographic mobility and mobility across sectors of the economy?

Tolstoy famously started Anna Karenina with the comment: \”All happy families are alike; each unhappy family is unhappy in its own way.\” Each unhappy recession is unhappy its own way, too–and the Great Recession is quite different from previous post-war U.S. recessions. It needs some fresh thinking about policies to address what has happened.

If Only the Government Could Wave a Magic Wand and Create Jobs

I\’ve written a \”Commentary\” for Minnesota Public Radio\’s news site, \”If only the government could wave a wand and create jobs.\” You can check it out at the MPR website, with an actual photo of me, or just read it here:

\”If only the government could wave a wand and create jobs\”

by Timothy Taylor

September 15, 2011

Back in 1993 there was a movie called \”Dave,\” which I went to see because it starred Kevin Kline. But for an economist, the ending of the movie was physically painful, because I was rolling my eyes so hard.

In \”Dave,\” an everyday person who looks like the president of the United States ends up through a comic chain of implausibilities actually becoming president. The big end-of-movie wind-up for Kevin Kline\’s \”Dave\” character, acting as the wise and beloved president, is passing a law to eliminate unemployment by having the government guarantee a job for everyone.

You don\’t have to be an economist to suspect that solving unemployment isn\’t this simple. Really? The only reason the United States has unemployment is that we haven\’t passed a law guaranteeing jobs for all? And this great idea of eliminating unemployment by guaranteeing jobs for all hasn\’t occurred to Germany or Sweden or Japan or any other country?

Off the movie screen, incentives and tradeoffs can\’t be ignored. If the government is going to guarantee jobs with wages, it needs to pay for it with taxes, which affects incentives for those who pay current taxes, or with borrowed money, which tends to crowd out private-sector borrowers in the present and also affects the workers who will need to pay taxes to repay that borrowing in the future. Moreover, if you \”guarantee\” a job, what will be the pay and benefits? Is the job permanent? Does the government also pay for transportation and child care? Can the government require that you move to another place to take the job? What\’s the motivation to do the guaranteed job if you can\’t be fired? How will firms react when their current and potential employees can take these government jobs? How do we draw the line between helping those who would be unemployed and turning on a government spending spigot that will be hard to shut off?

Eighteen years after \”Dave,\” I still roll my eyes when people talk as if the government can cure unemployment by passing a law. However, when an economy is sunk in recession, government can help to ease the pain with a combination of temporary spending increases and tax cuts. Thus, although I have I have my quarrels with how the various laws were designed and targeted, I overall supported both the Bush economic stimulus package in 2008 and the Obama stimulus in 2009.

I was predisposed to support at least some of President Obama\’s most recent labor proposals as well, with the unemployment rate still above 9 percent, but the proposals don\’t seem politically serious. When Obama gave his speech last Thursday, exhorting Congress to pass his bill without delay, he had not yet sent Congress a bill.

Then, when the bill arrived early this week, it no longer proposed having the bipartisan deficit commission take the jobs plan into account in its plans to address the deficit in the middle term — as Obama had proposed in the Thursday speech — but instead called for limiting deductions for those with high incomes. I favor raising the tax burden on those with higher incomes as part of an overall medium-term deficit-reduction package. But raising that issue now works against gaining support for an immediate bill to help some of the unemployed.

Ultimately, all of these bills are temporary palliatives–aspirin to dull the pain of a feverish economy. Government-supported jobs and stimulus packages are worthwhile when the unemployment rate is stuck above 9 percent, but they aren\’t a long-run path to lower unemployment. The economy needs hiring by private firms.

A pro-jobs agenda for the long run is a tougher task than waving a \”Dave\”-type magic wand. Some useful steps might include the following:
Build a national program of apprenticeships to connect high school students with real-world job skills and possible future employers, as has been done in Germany.

Redesign unemployment and disability rules to encourage employment while still protecting the needy, as has been done in the Netherlands and Denmark.

Overhaul and retarget the 45 or so federal job training programs that already exist. Provide greater support for job search and for moving to take a job.

Other steps would focus on the broad climate for business:
Reform the corporate tax code to close loopholes, reduce tax rates and encourage investment.

Make sure that firms are following rules about environmental protection, financial disclosure and safety of workers and consumers, but then get out of the way and let them function.

Take concrete steps to put federal government finances on a sustainable path over the next five to 10 years.

For most of the second half of the 20th century, the U.S. economy could assume, through better and worse years, that many firms would do most of their production within America\’s boundaries. But in the globalizing economy of the 21st century, firms have more choices. The United States needs to rethink and redesign its economic institutions to make itself a more attractive location when firms are deciding where to produce and hire.
Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul. He blogs at conversableeconomist.blogspot.com.

The U.S. Labor Market in International Context

The Division of International Labor Comparisons at the U.S. Bureau of Labor Statistics has put out the 2011 edition of its chartbook, Charting International Labor Comparisons. There are sections with comparisons on GDP, manufacturing, and consumer prices. Here, I\’ll stick to a few charts of comparisons on labor force participation levels, employment rates, and unemployment rates that caught my eye.

In terms of employment growth, the light blue lines show job growth from 2000 to 2007. The dark blue lines show job growth–positive or negative–from 2007 to 2009. BLS writes: \”Between 2007 and 2009, the sharpest declines in employment were in Estonia and Spain, followed by Ireland and the United States.\” Notice that over the 2007 to 2009 period, many countries have had job growth that was positive, or only very slightly negative.

Here are three measures of unemployment, as explained by BLS. \”UR 1 is the most restrictive rate of labor
underutilization and consists only of the subset of the unemployed who were unemployed for at least 1 year. UR 3 is the official unemployment rate and the most widely recognized. The broadest rate, UR 6, includes
the unemployed, the marginally attached, and persons who are employed but who worked fewer hours than they would like (i.e., the time-related underemployed).\” Spain clearly has the most grievous unemployment problem. But while the U.S. economy is OK on it\’s long-term unemployment rate–at least as of the 2009 date for this data–it\’s official unemployment rate and its broader rate of labor market underutilization are among the worst of the rest.

In terms of labor force participation rates for men and women. BLS writes: \”The highest participation rates for men were in large emerging economies: Brazil, India, Mexico and China. China also had the highest participation rate for women and, thus, a relatively low gender gap.\” The U.S. shows up here are roughly comparable to a number of other high-income countries.

In labor force participation rate by age, the U.S. doesn\’t look especially good in the prime-age 25-54 age group, but performs relatively well in younger and older age groups. As BLS points out: In Argentina and the
Philippines, more than one-third of persons ages 65 and older were still in the labor force. In contrast, many European countries had rates below 5 percent for this age group. Participation rates among youth varied most across countries. The Netherlands and Australia had the highest participation rates (above 70 percent) while
Hungary, the Republic of Korea, and Greece had the lowest rates (under 30 percent).\”

When it comes to labor force participation as a share of the working age population, BLS writes: \”Italy was the only country with less than half of its working-age population engaged in the labor force.\” Given the financial difficulties in Greece, it\’s interesting to see its very low rate of labor force participation among working age adults. 


U.S. Labor Market Sclerosis?

Whatever happened to the vaunted flexibility of the U.S. labor market, able to rebound from recessions back toward full employment? I\’m not sure how to tell a story that blends public policy choices with changes in hiring and layoff practices, but here are some intriguing fact patterns that would need to be part of the story. 

The percentage share of those who are unemployed and find a job by the next quarter has been trending down for about four decades. Interestingly, the percentage share of those who have a job and are separated from it has also been trending down for about three decades. Here\’s a figure from Pedro Amaral of the Cleveland Fed: 

The U.S. employment-to-population ratio for some decades substantially exceeded that of the nations of western Europe. But in the last couple of decades, the rates have converged. Here\’s a figure from Christian Grisse, Thomas Klitgaard, and Aysegul Sahin of the New York Fed:

In the recent recession, many other economies responded by reducing hours-per-worker, and thus keeping employment rates relatively high. The U.S. economy kept hour-per-worker high, but saw a sharp drop in employment. Here\’s a figure from the annual IMF report on the U.S. economy:

In the Recovery: Men Gaining Jobs, Women Losing Jobs

During the Great Recession, male workers suffered more than female workers. However, in the roughly two years since the recession bottomed out in June 2009, male workers have gained a disproportionate share of the new jobs. Rakesh Kochhar at the Pew Research Center has a report out making this point.

Kochar writes: \”The recovery from the Great Recession is the first since 1970 in which women have lost jobs even as men have gained them. …It is not entirely clear why men are doing better than women in the current recovery….The more notable developments are that men have found jobs in sectors where women have not, and that men made stronger advances than women in other sectors.\”

Thanks to David Autor for the pointer.

Long-Term Unemployment in the U.S.

Andreas Hornstein and Thomas A. Lubik of the Richmond Fed write about \”The Rise in Long-Term Unemployment: Potential Causes and Implications.\” They define long-term unemployment as lasting more than 26 weeks. They write: “The share of long-term unemployment [as a proportion of total unemployment]  peaked at 46 percent in the second quarter of 2010, and averaged a bit more than 43 percent for all of 2010. This peak value for the share of long-term unemployment is significantly higher than the previous peak of 26 percent that was attained following the 1981–82 recession. Finally, mean duration of unemployment had increased to about 35 weeks by the middle of 2010, again a substantial increase over the previous peak for mean unemployment duration of 21 weeks after the 1981–82 recession. Never before in the postwar period have unemployed workers been unemployed for such a long time.”

Here\’s an illustrative figure. The left axis measures the unemployment rate. The right axis measures what share of the unemployed are long-term unemployed–more than 26 weeks.

Much of the rise in overall unemployment is due more people entering long-term unemployment than in the past, and to those who have been long-term unemployed having a harder time finding jobs than in the past. This is a potentially major change for the U.S. economy. This figure shows that over the 1968 to 2006 period, U.S. workers were employed in any given month had one of the highest chances compared to other countries of losing that job in that month, but at the same time, a U.S. worker who was unemployed in any given month also had the highest chance of finding a job that month compared to other countries.

The very high rates of long-term unemployment, and the difficulties that the long-term unemployed are having in finding jobs, suggests that the true unemployment picture may be even more grim than the headline statistics suggest.