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

Mary Zenker |

Research Analyst

Mary Zenker

Mary Zenker is a former research analyst in the Research Department at the Federal Reserve Bank of Cleveland.

05.09.11

Economic Trends

What’s Up with the Unemployment Rate?

Murat Tasci and Mary Zenker

The unemployment rate jumped back to 9 percent in April, after declining a full 1 percentage point between November 2010 and March. Both the decline and the increase came as a surprise to many. Though signs of a recovery had appeared in the aggregate economy as early as the second quarter of 2009, the unemployment rate had stayed persistently high, above 9 percent, for more than 20 months. Then over the course of four months, the rate unexpectedly fell 1 percentage point, reflecting both an increase in household employment and a reduction in labor force participation. Most recently, the rate jumped up by 0.2 percentage point in April. Hence, over the past five months employment (as measured in the Bureau of Labor Statistics household survey) has increased by close to 800,000, while the number of unemployed workers has declined by about 1.3 million.

In some ways, these ups and downs should not be surprising even this far into the recovery. We would expect unemployment to go down as the economy recovers and firms start to create jobs. On the other hand, the number of unemployed workers looking for a job might also grow, if previously discouraged workers or those not looking for work start coming back to the labor force as the prospect of finding a job improves. These two channels can play against each other in determining the unemployment rate, and they certainly have in this recovery. Which channel will dominate over the next few months is an open question.

In this article we focus on some of the dynamics acting on those channels. Specifically, we consider the behavior of workers who have been unemployed for a long time and more generally, the gross flows of the entire pool of unemployed workers.

What is unique about this recession is that we have a very large pool of long-term unemployed workers. We would expect that workers who are unemployed for longer periods might lose their contacts (maybe even skills) and might have a harder time finding a job than those who go through shorter spells of unemployment.

The number of workers unemployed for fewer than 5 weeks has essentially returned to pre-recession levels. While this group has been successful in finding employment (or choosing to move out of the labor force) as the recovery continues, the same can’t be said for those unemployed for longer periods. The pool of individuals unemployed for 15 to 26 weeks has made some progress in returning to pre-recession levels, but if this expansion is like the last one, this pool could retain a larger number of individuals throughout the recovery.

The number of long-term unemployed workers (27 weeks or more) is exceptionally large right now; 22 months into the recovery, it has more than tripled from pre-recession levels. This group tends to have the most persistent unemployment and take the longest to return to trend levels. In the previous expansion, the number of long-term unemployed workers, like the number of those unemployed 15 to 26 weeks, never returned to pre-recession levels.

Gross flows data can show us the frequency with which workers are transitioning from unemployment to other states, such as employment or inactivity; that is, we see the fraction of workers unemployed in the previous month who found jobs in the current month (moved into employment), stay unemployed, or moved out of the labor force. On average, a little more than half of all unemployed workers have stayed unemployed month to month since the early 1990s. During recessions, unemployment becomes a persistent problem, and we see this fraction rise. Obviously, as the demand for labor declines, a smaller number of the unemployed can find jobs, and transitions into employment decline at these times.

One interesting feature of the current recovery is that we are observing for the first time that greater numbers of unemployed workers are transitioning out of the labor force rather than to employment. Some economists believe that expiring Emergency Unemployment Compensation (EUC) could be contributing to the higher number of transitions out of the labor force. If EUC is responsible for some part of the increase, the number of individuals transitioning out of the labor force from unemployment should increase as the number receiving extended benefits decreases (for example, as benefits expire). The underlying assumption is that some individuals have been remaining in the labor force, despite being only marginally attached to it, in order to collect unemployment benefits. This sequence of events would have a tendency to lower the unemployment rate as well as measures of labor force participation going forward.

However, the transition of long-term unemployed workers out of the labor force did not account for the totality of the decline in the unemployment rate that we’ve seen in the past five months. There is no direct way of measuring this per se, but we can see it is pretty likely to be the case by looking at the relationship between the number of those unemployed 27 weeks or more and the number of those receiving EUC. Since the number of long-term unemployed workers peaked in May 2010, it has decreased by about 870,000. Over the same period, the number of people receiving extended benefits has decreased by slightly more than 1 million. Thus, some workers whose benefits are expiring are moving out of the labor force and some are staying in.

Still, we should not assume that all of those leaving the labor force after their benefits expire would have left sooner had it not been for EUC. We can get a little insight into this question by comparing the types of people who left the labor force before and after there was EUC. If EUC is playing a big role, we’d expect the pool of people who are now outside the labor force to consist of the types of people who are typically marginally attached to the workforce—mothers, retirees, etc.

But the characteristics of workers who were not in the labor force in 2007 are not drastically different from those who were not in the labor force in 2010. The age distribution has changed only slightly; young workers (age 20 to 24) represent a slightly larger share now (7.4 percent in 2010 compared to 6.8 percent in 2007), workers aged 35 to 54 have decreased their share (from 18.3 percent in 2007 to 17.7 percent in 2010), and the share of workers aged 55 and older is virtually unchanged (53.5 percent in 2007 to 53.0 percent in 2010). This small shift in shares partly reflects the pursuit of more education by young workers, which is typical when prospects of finding a job decline.