New Evidence on Cyclical and Structural Sources of Unemployment

Abstract

We 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 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. JEL Classification Numbers: E24, E32, E44, J6, J64

Switching and asymmetric behaviour of the Okun coefficient in the US: Evidence for the 1948–2015 period

“…Our answer to the puzzle of why jobs have not recovered after the GFC is consistent with the idea espoused by Chen et al (2011) and Katz (2010), among others, that the jobless recovery in the US reflects structural unemployment that does not respond to positive upswings in aggregate demand. The existence of long-term structural unemployment is worrisome because the long-term unemployed face myriad problems, including loss of human capital, increased morbidity and increased mortality later in life (see e.g.…”

“…The puzzle is: why haven't jobs in the US recovered with higher growth following the GFC (see e.g. Abo-Zaid, 2013;Chen et al, 2011;Cheng et al, 2012;Owyang and Sekhposyan, 2012). As economists have struggled to explain the jobless recovery in the US, debate has centred on whether Okun's law, which has been described as "one of the fundamental macro relationships" (Cazes et al, 2013, p. 2), has broken down and the previous enduring appeal of Okun's law changed permanently (see e.g.…”

“…First, it has broader implications for labour market policies. Concern that the stable relationship between unemployment and output, captured in Okun's law, has broken down in the US following the GFC has raised the spectre that an increase in structural unemployment is behind the jobless recovery (Chen et al, 2011;Katz, 2010). The issue of whether weak labour market performance in the US can be attributed to cyclical fluctuations in demand or supply or reflects underpinning structural factors goes to the heart of the appropriate policy response (Algan, 2002).…”

International Effects of Stock Market Dispersion

“…We also find these responses to be persistent, lasting up to 20 months in some cases. These results dovetail with the findings of Loungani (), Davis (), and more recently Chen et al () in the sense that increases in stock market dispersion, as a proxy for sector shifts, signal depressed economic activity.…”

Regional and Sectoral Evidence of the Macroeconomic Effects of Labor Reallocation: A Panel Data Analysis

“…There has been considerable discussion over sectoral shifts (shifts in sectors employment demand) as a triggering force of unemployment fluctuations in the United States (see Chen et al 2011;Diamond 2013;Elsby, Hobijn, and Sahin 2010;Estevão and Tsounta 2011). In a recent work, Dao, Furceri, and Loungani (2014) compare regional labor market adjustments in the United States and Europe and find that dispersion been developing along several dimensions and a variety of econometric methodologies.…”