Meet the Author

Murat Tasci |

Research Economist

Murat Tasci

Murat Tasci is a research economist in the Research Department of the Federal Reserve Bank of Cleveland. He is primarily interested in macroeconomics and labor economics. His current work focuses on business cycles and labor markets, labor market policies, and search frictions.

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Meet the Author

Beth Mowry |

Research Assistant

Beth Mowry

Beth Mowry was formerly a research assistant in the Research Department of the Federal Reserve Bank of Cleveland. Her work focuses on labor markets and business cycles.

09.19.08

Economic Trends

Trend Unemployment and What It Says about Unemployment Patterns

Murat Tasci and Beth Mowry

The unemployment rate increased to 6.1 percent in September from 5.7 percent a month earlier. Just a few months ago, in May, the rate experienced another sharp rise, from 5.0 to 5.5 percent.  A year ago, the unemployment rate was just 4.7 percent.  Such movements in the unemployment rate are not unusual by any measure, and they have been studied for a long time.  For the past 60 years, the unemployment rate has varied between 2.5 percent and 10.8, rising during recessions and falling during expansions. This pattern makes it what economists call a countercyclical variable. Typically, the rate rises sharply at the onset of a recession, but it usually takes a while for the rate to drop back down once the recession ends. These cyclical fluctuations in the unemployment rate are a robust feature of the data, and even though the timing of the ups and downs changes somewhat across different historical episodes, the clear countercyclical pattern tends to hold. 

However, monthly fluctuations in the unemployment rate include a lot of cyclical movements that may be only temporary. Removing those cyclical elements can help to see the longer-term picture, and this we can do by smoothing the data to calculate the unemployment rate’s trend.  When we look at the trend along with the monthly data for the last two recessions and the recoveries that followed, we see that the trend increased slightly in both cases, but the unemployment rate stayed above the trend for more than two years. This view shows that it takes a while for the unemployment rate to return to its long-run trend after recessions, but once it gets there, it stays there for the rest of the expansion.  The unemployment rate returns to its trend only when the expansion is long enough, like the two that preceded the 2001 recession.

One might expect the pattern just described to be different for various segments of the workforce, since workers’ desire for employment or their employability can differ, depending on their age, gender, or education. For instance, older workers have always had lower unemployment rates than younger workers.  Because older workers are arguably more attached to the labor force and more experienced at their jobs, they are less likely to be let go in a downturn and more likely to be hired in a boom.  This story likewise explains the higher unemployment rate of younger workers as well as its greater volatility. However, the trend rates for different-aged workers in general follow the overall pattern of the aggregate unemployment rate.  A look at the trends also suggests that most of the upward trend in unemployment in the late 1960s and 1970s, as well as the downward trend that followed, was led by young workers.

Education does not appear to affect the basic countercyclical unemployment pattern either.  As one might expect, years of schooling is negatively correlated with the unemployment rate.  For instance, workers with at least a college degree have the lowest unemployment rate, around 2.4 percent on average since 1992.  This compares with 3.9 percent for workers with some college, 4.8 percent for high school graduates, and 8.9 percent for high school drop outs.  Even though we do not have a long enough time series to detect a clear cyclical pattern, we can see that over the last recession the behavior of the unemployment rates of workers with different levels of education fits the general picture.

The unemployment rate for men and women also follows the countercyclical pattern, rising around the start of recessions and falling after the end of downturns. On the other hand, the overall trend in each of the two groups has been steadily changing over time.  Until mid-1980s, the unemployment rate for women stayed consistently below that of men.  Since then, the two unemployment rates have almost converged.  One reason for this could be the higher labor force participation and higher educational attainment of women in the past two decades.  These two potentially related facts created a female workforce with a stronger attachment to the labor market, whose unemployment profile increasing resembled that of men. One might even argue that the unemployment rate trend for men is now above the women’s.