Do Frequent Recessions Cause the Unemployment Rate to Trend Up Over Time?

When it comes to analyzing economic indicators to predict where the US economy is headed, the unemployment rate is arguably the metric familiar to most people. A high or rising unemployment rate is a signal of macroeconomic slack or contraction, and a low or falling unemployment rate is a signal of macroeconomic health or expansion.

In this Economic Commentary, Cleveland Fed researcher Kurt Lunsford suggests an additional, previously unrecognized source of the unemployment trend: the frequency of recessions. Because the unemployment rate rises quickly in recessions but falls slowly in expansions, it may not fall to its previous low point if a recession cuts an expansion short. Hence, frequent recessions can cause the unemployment rate to trend up over time.

“I find that the US unemployment rate indeed trended up with the rapid accumulation of recessions prior to 1983 and then trended down again with the slow accumulation of recessions after 1983,” says Lunsford. “I estimate the relationship between recessions and the unemployment rate and find long-horizon forecasts conditioned on no future recessions project that the unemployment rate will go to 3.6 percent after a long period with no recessions.”

Read the Economic Commentary.

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.455.4479