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Cyclical or Structural? Evidence on the Sources of U.S. Unemployment

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Abstract

We provide 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”) and monetary and fiscal policies. Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25 %. For long-term unemployment the split between cyclical and structural factors is closer to 60–40, including during the Great Recession. Examination of the industry-level stock returns suggests that adverse shocks to the construction sector and, to a lesser extent, the finance sector were responsible for the increase in structural unemployment. The Great Recession appears similar to the recession of 1973–75, as sectoral shocks played a large role at that time as well.

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Notes

  1. 1.

    Similarly, the jobless recovery following the 2001 U.S. recession led some observers, notably Groshen and Potter (2003), to assign a significant role to structural factors, while others took a more skeptical view (e.g. Aaronson et al. 2004).

  2. 2.

    Effective January 2011, the Current Population Survey (CPS) was modified to allow respondents to report durations of unemployment of up to 5 years. Prior to that time, the CPS accepted unemployment durations of up to 2 years; any response of unemployment duration greater than this was entered as 2 years. For the first 6 months of 2011, the new measure of mean duration exceeded the old by 2.3 weeks on average.

  3. 3.

    Homebuilders are a subset of the construction industry, but the unemployment data are only available at relatively high levels of aggregation. We are currently engaged in constructing matching unemployment and stock market series.

  4. 4.

    Once again, commercial banks are a subset of the finance industry.

  5. 5.

    A lag length of 4 quarters was found to be optimal.

  6. 6.

    Specifically, 500 pseudo-coefficients are drawn from a multivariate normal distribution based on the estimates of the mean and variance-covariance matrix of the regression coefficient vector.

  7. 7.

    Standard errors are computed using the statistics based on the asymptotic distribution.

  8. 8.

    We also estimate the VAR using levels of variables with quadratic trends instead of the log of difference of the variables. The impact of dispersion on unemployment is reduced somewhat but it remain statistically significant and the variance decomposition is not much changed.

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Acknowledgements

We thank our discussants, Steve Davis and Valerie Ramey, and other participants at the 2012 Annual Macro Conference of the Federal Reserve Bank of San Francisco. We thank Hites Ahir, Sam Choi and Jair Rodriguez for outstanding research assistance. We acknowledge useful comments from Daniel Aaronson, Larry Ball, Olivier Blanchard, Menzie Chinn, Robert Hall, Joao Jalles, Sam Kortum, Daniel Leigh, Akito Matsumoto, Gian Maria Milesi-Ferretti, Dale Mortenson, Romain Ranciere, Ellen Rissman, Jorge Roldos, David Romer, Kenichi Ueda, Ken West and participants at the Conference on “Globalization: Strategies and Effects” (organized by Bent Jesper Christensen and Carsten Kowalczyk in Kolding, Denmark), Conference on “Long-Term Unemployment” (organized by Menzie Chinn and Mark Copelovitch at University of Wisconsin, Madison), IMF, Paris School of Economics and the Midwest Economic Association meetings in Chicago.

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Authors and Affiliations

  1. Industrial and Commercial Bank of China, Beijing, China

    Jinzhu Chen

  2. Government of Singapore Investment Corporation (GIC), Singapore, Singapore

    Prakash Kannan

  3. International Monetary Fund, Washington, DC, USA

    Prakash Loungani

  4. Federal Reserve Bank of San Francisco, San Francisco, CA, USA

    Bharat Trehan

Authors
  1. Jinzhu Chen
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  2. Prakash Kannan
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  3. Prakash Loungani
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  4. Bharat Trehan
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Corresponding author

Correspondence to Prakash Loungani .

Editor information

Editors and Affiliations

  1. Department of Economics and Business Economics, Aarhus University, Aarhus, Denmark

    Bent Jesper Christensen

  2. The Fletcher School, Tufts University, Medford, Massachusetts, USA

    Carsten Kowalczyk

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Chen, J., Kannan, P., Loungani, P., Trehan, B. (2017). Cyclical or Structural? Evidence on the Sources of U.S. Unemployment. In: Christensen, B., Kowalczyk, C. (eds) Globalization. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-49502-5_10

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  • DOI: https://doi.org/10.1007/978-3-662-49502-5_10

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