Tuesday, February 1, 2011

Unemployment After The Recession: Mostly Cyclical Says Cleveland Fed

From Federal Reserve Bank of Cleveland Economic Commentary, "High Unemployment after the Recession: Mostly Cyclical, but Adjusting Slowly" by Murat Tasci:
Note: The recession average is the average unemployment rate progression for postwar recessions, and the range is plus or minus one standard deviation.
Source: Bureau of Labor Statistics.

Many economists, policymakers, and forecasters anticipate that the unemployment rate will stay above 9 percent over the near term. Their forecasts typically assume that the underlying trend of the unemployment rate, sometimes dubbed the “natural rate of unemployment,” must have risen over the course of the last recession. But it is more likely, given the size of the drop in aggregate economic activity during the recession (4.15 percent, the largest in postwar U.S. history), that the unemployment rate’s rise is due mostly to cyclical factors. I argue that even if the unemployment-rate trend has not increased, the unemployment rate could still stay high for some time. Moreover, the weakness of the recovery in real output and the slow rate of worker reallocation are likely to keep unemployment from declining to pre-recession levels any time soon.

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