We know unemployment continues to rise. We don't know whether the rate of unemployed workers is going up because more and more people are losing their jobs, or because those out of work are staying out of work longer. Murat Tasci and Kyle Fee of the Cleveland Fed wanted to know whether it matters:
This distinction could be important because each of these causes could result in a different set of problems for the labor force. Long-term unemployment, for example, might lead to a deterioration in workers’ general or occupation-specific skills, which would reduce their productivity if they ever do find jobs. An economy in which 10 percent of the labor force was unemployed for three months and 90 percent was unemployed for one month would have the same unemployment rate as one in which 10 percent of the labor force was permanently unemployed all year round, but the implications for human capital would be quite different in each scenario.
To understand how much each of these factors contributes to a rise in the unemployment rate, we looked at inflows into unemployment (job separation rate) and outflows from the unemployment pool (job finding rate) for all postwar recessions. In general, we found that as the economy enters a downturn, separations start rising and unemployment durations start getting longer (job findings decrease). After some adjustment in terms of employment by firms, separations usually start to fall before the unemployment rate peaks. What accounts for most of the subsequent rise in the unemployment rate is the longer unemployment durations of those who are still unemployed. Once the economy finally starts recovering, durations get shorter as firms create new jobs and absorb some of the unemployed.


Read The Incidence and Duration of Unemployment over the Business Cycle here.
Posted
09-09-2009 4:54 PM
by
Graham Griffith