EPI BRIEFING PAPER
E C O N O M I C P O L I C Y I N S T I T U T E • A U G U S T 8 , 2 0 1 4 • B R I E F I N G PA P E R # 3 8 1LAGGING DEMAND, NOT UNEMPLOYABILITY, IS WHY LONG-TERM UNEMPLOYMENT
REMAINS SO HIGH
B Y J O S H B I V E N S A N D H E I D I S H I E R H O L Z
ECONOMIC POLICY INSTITUTE • 1333 H STREET, NW • SUITE 300, EAST TOWER • WASHINGTON, DC 20005 • 202.775.8810 •WWW.EPI.ORG
Table of contents
Executive Summary...3
Background...4
Macroeconomic evidence from outside the labor market strongly suggests a large gap between demand and supply...5
Direct estimates of productive capacity...5
Measures of price inflation...7
Evidence from interest rates...9
Evidence from corporate profits...10
Is there evidence that the long-term unemployed have hardened into the structurally unemployed?...11
No sign of an increasing skills mismatch...11
Unemployment insurance extensions led to a trivial increase in the time it took to take another job...14
Do the long-term unemployed put downward pressure on wages?...14
Some studies do find downward wage-pressure stemming from elevated LTU...17
Improving wage-growth predictions in the future: Drop the LTUR or drop 2009–2012?...18
Currently, long-term unemployment is what we would expect given historical trends...20
Conclusion...23
About the authors...23
Appendix A: Analysis for Table 1, and Appendix Table B1 (LTUR by State)...24
Endnotes...27
References...27
EPI BRIEFING PAPER #381|AUGUST 8, 2014 PAGE 2
Executive Summary
W
hile the rate of short-term unemployment (joblessness lasting less than 27 weeks) has fallen to almost pre- Great Recession levels, the rate of long-term unemployment (joblessness lasting for 27 weeks or more) is still significantly elevated from its pre-Great Recession levels. This has led some economic observers to infer that there is actually less labor market slack in the U.S. economy than the overall rate of unemployment would sug- gest. This argument hypothesizes that movements in the short-term unemployment (STU) rate are largely cyclically determined, but that the long-term unemployment (LTU) rate is now essentially a component of “structural” unem- ployment. Structural unemployment is when workers don’t have the skills that employers are currently demanding, do not live where jobs using their skills are located, or face some other barrier to finding work that cannot be solved by an increase in aggregate demand relative to potential supply. Cyclical unemployment, conversely, can be addressed by boosting aggregate demand relative to potential supply.This briefing paper examines competing explanations for the still-elevated long-term unemployment rate (LTUR) and assesses what if anything the elevated LTUR means for estimates of how much slack remains in the U.S. labor market.
Following are the key findings of the paper:
Evidence from outside of labor market indicators strongly suggests that there is still a continuing, large shortfall of aggregate demand relative to potential supply.
Measures of core inflation remain extraordinarily low even in the face of historically expansionary monetary policy, signaling substantial economic slack.
Interest rates remain extraordinarily low, even following years of historically large federal budget deficits, signaling that desired savings remain large relative to planned investments—another sign of economic slack.
Profit margins are at their highest levels since the 1960s and show little sign of having peaked. If economic slack were falling, we would see increasing downward pressure on profit margins as labor’s share of compen- sation increases.
Evidence indicating a rise in structural barriers to finding employment is scarce.
There is no evidence of an increasing skills mismatch that may be reducing the exit rate from unemploy- ment and therefore increasing the share of the labor force that is long-term unemployed.
The weight of the evidence shows that the long-term unemployed as a group have put downward pressure on wages, which indicates that they are a meaningful component of remaining cyclical weakness and have not “hardened” into structural unemployment. (In other words, they have not moved from being employ- able if demand picks up to being unemployable because they no longer have the right skills.)
Currently, the long-term unemployment rate is almost exactly what would be expected given the historical rela- tionship between the long-term unemployment rate and the overall unemployment rate, and since late 2011, the long-term unemployment rate has in fact fallen faster than what would be predicted. What was unusual was the large increase in the LTUR relative to the overall unemployment rate during the Great Recession and its immediate
EPI BRIEFING PAPER #381|AUGUST 8, 2014 PAGE 3
FIGURE A VIEW INTERACTIVE on epi.org
Short-term and long-term unemployment rates, 1979–2014
Note: Shaded areas denote recessions.
Source: Authors’ analysis of the Current Population Survey public data series from the Bureau of Labor Statistics
4.0%
2.0%
Short-term unemployment rate Long-term unemployment rate
1980 1985 1990 1995 2000 2005 2010 2015
0 10%
2.5 5 7.5
aftermath. But the timing of this rise alone (i.e., during and immediately after the sharpest and longest economic contraction in seven decades) argues strongly for cyclical causes.
Background
Figure A shows the short-term unemployment rate and the long-term unemployment rate since 1979. As the figure shows, the STUR—the share of workers who have been jobless for less than 27 weeks—has fallen to almost pre-Great Recession levels. But the LTUR—the share of workers who have been jobless for 27 weeks or more—is still significantly elevated from its pre–Great Recession levels. This has people debating why long-term unemployment remains so high.
To understand why, we need to look at the patterns. While both rates clearly move in tandem over the business cycle, the large increase in the LTUR between the spring of 2008 and the spring of 2010 is striking. This very large increase during (and immediately after) the Great Recession has led to an elevated LTUR over an extended period, even as it has largely followed the STUR down over the official recovery.
The simple timing of these patterns suggests that the real discontinuity with historical patterns that needs to be explained is the large rise in the LTUR during the Great Recession and its immediate aftermath and not the behavior of the LTUR today. This is an important insight for current debates over the extent of labor market slack remaining in the U.S. economy. The argument that slack has been substantially reduced hinges largely on believing that the long-term
Date
Short-term unemployment
rate
Long-term unemployment
rate 1979/
01/01 5.3% 0.5%
1979/
02/01 5.4% 0.5%
1979/
03/01 5.3% 0.6%
1979/
04/01 5.3% 0.5%
1979/
05/01 5.2% 0.5%
1979/
06/01 5.2% 0.5%
1979/
07/01 5.3% 0.4%
1979/
08/01 5.5% 0.5%
1979/
09/01 5.3% 0.5%
1979/
10/01 5.4% 0.5%
1979/
11/01 5.3% 0.5%
1979/
12/01 5.4% 0.5%
1980/
01/01 5.7% 0.5%
1980/
02/01 5.8% 0.5%
1980/
03/01 5.8% 0.6%
1980/
04/01 6.3% 0.6%
1980/
05/01 6.9% 0.7%
1980/
06/01 6.8% 0.7%
1980/
07/01 6.9% 0.8%
1980/
08/01 6.8% 0.9%
1980/
09/01 6.6% 0.9%
1980/
10/01 6.5% 1.0%
1980/
11/01 6.4% 1.1%
1980/
12/01 6.1% 1.1%
1981/
01/01 6.3% 1.2%
1981/
02/01 6.3% 1.2%
1981/
03/01 6.3% 1.1%
1981/
04/01 6.2% 1.0%
1981/
05/01 6.5% 1.1%
1981/
06/01 6.3% 1.0%
1981/
07/01 6.3% 1.0%
1981/
08/01 6.3% 1.1%
1981/
09/01 6.6% 1.0%
1981/
10/01 6.9% 1.0%
1981/
11/01 7.2% 1.0%
1981/
12/01 7.5% 1.1%
1982/
01/01 7.5% 1.1%
1982/
02/01 7.7% 1.2%
1982/
03/01 7.9% 1.2%
1982/
04/01 8.0% 1.4%
1982/
05/01 8.0% 1.5%
1982/
06/01 7.9% 1.6%
1982/
07/01 8.1% 1.6%
1982/
08/01 8.2% 1.7%
1982/
09/01 8.4% 1.8%
1982/
10/01 8.4% 2.0%
1982/
11/01 8.7% 2.1%
1982/
12/01 8.5% 2.3%
1983/
01/01 8.1% 2.4%
1983/
02/01 8.0% 2.5%
1983/
03/01 7.7% 2.5%
1983/
04/01 7.5% 2.5%
1983/
05/01 7.5% 2.5%
1983/
06/01 7.3% 2.6%
1983/
07/01 7.2% 2.3%
1983/
08/01 7.3% 2.3%
1983/
09/01 7.1% 2.2%
1983/
10/01 6.8% 2.0%
1983/
11/01 6.6% 1.9%
1983/
12/01 6.5% 1.8%
1984/
01/01 6.3% 1.8%
1984/
02/01 6.2% 1.6%
1984/
03/01 6.2% 1.6%
1984/
04/01 6.1% 1.6%
1984/
05/01 5.9% 1.5%
1984/
06/01 5.8% 1.4%
1984/
07/01 6.1% 1.4%
1984/
08/01 6.2% 1.3%
1984/
09/01 6.1% 1.3%
1984/
10/01 6.1% 1.3%
1984/
11/01 5.9% 1.2%
1984/
12/01 6.1% 1.2%
1985/
01/01 6.2% 1.1%
1985/
02/01 6.1% 1.2%
1985/
03/01 6.1% 1.2%
1985/
04/01 6.1% 1.2%
1985/
05/01 6.2% 1.1%
1985/
06/01 6.2% 1.1%
1985/
07/01 6.2% 1.1%
1985/
08/01 6.1% 1.1%
1985/
09/01 6.1% 1.1%
1985/
10/01 6.1% 1.0%
1985/
11/01 5.9% 1.1%
1985/
12/01 6.0% 1.0%
1986/
01/01 5.8% 0.9%
1986/
02/01 6.2% 1.0%
1986/
03/01 6.2% 1.0%
1986/
04/01 6.2% 1.0%
1986/
05/01 6.2% 1.0%
1986/
06/01 6.1% 1.1%
1986/
07/01 6.0% 1.0%
1986/
08/01 5.9% 1.0%
1986/
09/01 6.0% 1.0%
1986/
10/01 5.9% 1.0%
1986/
11/01 5.9% 1.0%
1986/
12/01 5.7% 1.0%
1987/
01/01 5.7% 1.0%
1987/
02/01 5.7% 0.9%
1987/
03/01 5.6% 0.9%
1987/
04/01 5.4% 0.9%
1987/
05/01 5.3% 0.9%
1987/
06/01 5.3% 0.9%
1987/
07/01 5.3% 0.8%
1987/
08/01 5.1% 0.9%
1987/
09/01 5.1% 0.8%
1987/
10/01 5.2% 0.8%
1987/
11/01 5.1% 0.8%
1987/
12/01 5.0% 0.7%
1988/
01/01 5.0% 0.7%
1988/
02/01 5.0% 0.7%
1988/
03/01 5.0% 0.7%
1988/
04/01 4.8% 0.7%
1988/
05/01 4.9% 0.7%
1988/
06/01 4.7% 0.7%
1988/
07/01 4.8% 0.7%
1988/
08/01 4.9% 0.7%
1988/
09/01 4.7% 0.7%
1988/
10/01 4.7% 0.6%
1988/
11/01 4.8% 0.6%
1988/
12/01 4.7% 0.6%
1989/
01/01 4.8% 0.6%
1989/
02/01 4.7% 0.5%
1989/
03/01 4.5% 0.5%
1989/
04/01 4.7% 0.6%
1989/
05/01 4.7% 0.5%
1989/
06/01 4.8% 0.5%
1989/
07/01 4.8% 0.5%
1989/
08/01 4.7% 0.5%
1989/
09/01 4.8% 0.5%
1989/
10/01 4.8% 0.5%
1989/
11/01 4.9% 0.5%
1989/
12/01 4.8% 0.5%
1990/
01/01 4.8% 0.5%
1990/
02/01 4.8% 0.5%
1990/
03/01 4.8% 0.5%
1990/
04/01 4.9% 0.5%
1990/
05/01 4.9% 0.5%
1990/
06/01 4.8% 0.5%
1990/
07/01 5.0% 0.5%
1990/
08/01 5.1% 0.6%
1990/
09/01 5.2% 0.6%
1990/
10/01 5.3% 0.6%
1990/
11/01 5.5% 0.7%
1990/
12/01 5.6% 0.7%
1991/
01/01 5.6% 0.7%
1991/
02/01 5.8% 0.7%
1991/
03/01 6.1% 0.8%
1991/
04/01 5.9% 0.8%
1991/
05/01 6.1% 0.8%
1991/
06/01 6.1% 0.9%
1991/
07/01 5.9% 0.9%
1991/
08/01 5.9% 0.9%
1991/
09/01 5.9% 0.9%
1991/
10/01 6.0% 1.0%
1991/
11/01 6.0% 1.1%
1991/
12/01 6.1% 1.2%
1992/
01/01 6.0% 1.3%
1992/
02/01 6.1% 1.3%
1992/
03/01 6.0% 1.4%
1992/
04/01 5.9% 1.4%
1992/
05/01 6.0% 1.5%
1992/
06/01 6.2% 1.7%
1992/
07/01 6.0% 1.7%
1992/
08/01 6.0% 1.6%
1992/
09/01 6.0% 1.6%
1992/
10/01 5.7% 1.7%
1992/
11/01 5.9% 1.6%
1992/
12/01 5.9% 1.6%
1993/
01/01 5.7% 1.5%
1993/
02/01 5.7% 1.5%
1993/
03/01 5.6% 1.4%
1993/
04/01 5.7% 1.3%
1993/
05/01 5.7% 1.4%
1993/
06/01 5.7% 1.4%
1993/
07/01 5.5% 1.4%
1993/
08/01 5.4% 1.4%
1993/
09/01 5.4% 1.4%
1993/
10/01 5.5% 1.4%
1993/
11/01 5.2% 1.4%
1993/
12/01 5.2% 1.4%
1994/
01/01 5.3% 1.3%
1994/
02/01 5.2% 1.3%
1994/
03/01 5.1% 1.4%
1994/
04/01 4.9% 1.3%
1994/
05/01 4.8% 1.3%
1994/
06/01 4.9% 1.2%
1994/
07/01 4.9% 1.2%
1994/
08/01 4.9% 1.2%
1994/
09/01 4.7% 1.2%
1994/
10/01 4.6% 1.2%
1994/
11/01 4.5% 1.1%
1994/
12/01 4.4% 1.0%
1995/
01/01 4.5% 1.0%
1995/
02/01 4.5% 0.9%
1995/
03/01 4.4% 1.0%
1995/
04/01 4.6% 1.1%
1995/
05/01 4.7% 1.0%
1995/
06/01 4.6% 0.9%
1995/
07/01 4.7% 0.9%
1995/
08/01 4.8% 0.9%
1995/
09/01 4.7% 1.0%
1995/
10/01 4.6% 0.9%
1995/
11/01 4.7% 0.9%
1995/
12/01 4.7% 0.9%
1996/
01/01 4.7% 0.9%
1996/
02/01 4.6% 0.9%
1996/
03/01 4.5% 1.0%
1996/
04/01 4.5% 1.0%
1996/
05/01 4.6% 1.0%
1996/
06/01 4.3% 1.0%
1996/
07/01 4.4% 1.0%
1996/
08/01 4.2% 0.9%
1996/
09/01 4.3% 0.9%
1996/
10/01 4.4% 0.9%
1996/
11/01 4.5% 0.8%
1996/
12/01 4.4% 0.9%
1997/
01/01 4.4% 0.8%
1997/
02/01 4.4% 0.8%
1997/
03/01 4.4% 0.8%
1997/
04/01 4.2% 0.8%
1997/
05/01 4.2% 0.8%
1997/
06/01 4.2% 0.8%
1997/
07/01 4.1% 0.8%
1997/
08/01 4.1% 0.8%
1997/
09/01 4.1% 0.8%
1997/
10/01 4.0% 0.8%
1997/
11/01 3.9% 0.7%
1997/
12/01 3.9% 0.7%
1998/
01/01 3.9% 0.7%
1998/
02/01 3.9% 0.7%
1998/
03/01 4.1% 0.7%
1998/
04/01 3.7% 0.6%
1998/
05/01 3.8% 0.6%
1998/
06/01 4.0% 0.6%
1998/
07/01 3.9% 0.6%
1998/
08/01 3.9% 0.6%
1998/
09/01 3.9% 0.7%
1998/
10/01 3.9% 0.6%
1998/
11/01 3.8% 0.6%
1998/
12/01 3.7% 0.6%
1999/
01/01 3.8% 0.5%
1999/
02/01 3.8% 0.6%
1999/
03/01 3.7% 0.5%
1999/
04/01 3.9% 0.5%
1999/
05/01 3.7% 0.5%
1999/
06/01 3.7% 0.6%
1999/
07/01 3.7% 0.5%
1999/
08/01 3.7% 0.5%
1999/
09/01 3.7% 0.5%
1999/
10/01 3.6% 0.5%
1999/
11/01 3.6% 0.5%
1999/
12/01 3.5% 0.5%
2000/
01/01 3.5% 0.5%
2000/
02/01 3.6% 0.4%
2000/
03/01 3.7% 0.5%
2000/
04/01 3.5% 0.4%
2000/
05/01 3.6% 0.5%
2000/
06/01 3.5% 0.4%
2000/
07/01 3.5% 0.5%
2000/
08/01 3.6% 0.5%
2000/
09/01 3.5% 0.5%
2000/
10/01 3.5% 0.4%
2000/
11/01 3.5% 0.4%
2000/
12/01 3.5% 0.4%
2001/
01/01 3.7% 0.5%
2001/
02/01 3.8% 0.5%
2001/
03/01 3.9% 0.5%
2001/
04/01 4.0% 0.5%
2001/
05/01 3.9% 0.4%
2001/
06/01 3.9% 0.5%
2001/
07/01 4.0% 0.5%
2001/
08/01 4.3% 0.6%
2001/
09/01 4.4% 0.6%
2001/
10/01 4.7% 0.6%
2001/
11/01 4.8% 0.8%
2001/
12/01 5.0% 0.8%
2002/
01/01 4.9% 0.8%
2002/
02/01 4.8% 0.8%
2002/
03/01 4.9% 0.9%
2002/
04/01 5.0% 1.0%
2002/
05/01 4.7% 1.1%
2002/
06/01 4.7% 1.1%
2002/
07/01 4.7% 1.1%
2002/
08/01 4.7% 1.1%
2002/
09/01 4.6% 1.1%
2002/
10/01 4.6% 1.1%
2002/
11/01 4.7% 1.2%
2002/
12/01 4.7% 1.3%
2003/
01/01 4.7% 1.2%
2003/
02/01 4.6% 1.3%
2003/
03/01 4.6% 1.2%
2003/
04/01 4.7% 1.3%
2003/
05/01 4.8% 1.3%
2003/
06/01 4.8% 1.4%
2003/
07/01 4.8% 1.3%
2003/
08/01 4.8% 1.4%
2003/
09/01 4.7% 1.4%
2003/
10/01 4.6% 1.3%
2003/
11/01 4.5% 1.4%
2003/
12/01 4.4% 1.3%
2004/
01/01 4.4% 1.3%
2004/
02/01 4.3% 1.3%
2004/
03/01 4.4% 1.4%
2004/
04/01 4.3% 1.2%
2004/
05/01 4.4% 1.2%
2004/
06/01 4.3% 1.3%
2004/
07/01 4.4% 1.1%
2004/
08/01 4.4% 1.1%
2004/
09/01 4.2% 1.2%
2004/
10/01 4.3% 1.2%
2004/
11/01 4.2% 1.1%
2004/
12/01 4.3% 1.1%
2005/
01/01 4.1% 1.1%
2005/
02/01 4.3% 1.1%
2005/
03/01 4.0% 1.1%
2005/
04/01 4.1% 1.1%
2005/
05/01 4.1% 1.0%
2005/
06/01 4.1% 0.9%
2005/
07/01 4.0% 0.9%
2005/
08/01 4.0% 0.9%
2005/
09/01 4.1% 1.0%
2005/
10/01 4.1% 0.9%
2005/
11/01 4.1% 0.9%
2005/
12/01 3.9% 0.9%
2006/
01/01 3.9% 0.8%
2006/
02/01 3.9% 0.9%
2006/
03/01 3.8% 0.9%
2006/
04/01 3.9% 0.9%
2006/
05/01 3.8% 0.9%
2006/
06/01 3.8% 0.8%
2006/
07/01 3.9% 0.9%
2006/
08/01 3.8% 0.9%
2006/
09/01 3.7% 0.8%
2006/
10/01 3.7% 0.7%
2006/
11/01 3.8% 0.7%
2006/
12/01 3.7% 0.7%
2007/
01/01 3.8% 0.7%
2007/
02/01 3.7% 0.8%
2007/
03/01 3.6% 0.8%
2007/
04/01 3.7% 0.8%
2007/
05/01 3.8% 0.7%
2007/
06/01 3.8% 0.7%
2007/
07/01 3.8% 0.8%
2007/
08/01 3.8% 0.8%
2007/
09/01 3.9% 0.8%
2007/
10/01 3.9% 0.8%
2007/
11/01 3.8% 0.9%
2007/
12/01 4.1% 0.9%
2008/
01/01 4.0% 0.9%
2008/
02/01 4.0% 0.9%
2008/
03/01 4.2% 0.9%
2008/
04/01 4.1% 0.9%
2008/
05/01 4.5% 1.0%
2008/
06/01 4.6% 1.0%
2008/
07/01 4.6% 1.1%
2008/
08/01 4.9% 1.2%
2008/
09/01 4.8% 1.3%
2008/
10/01 5.1% 1.5%
2008/
11/01 5.4% 1.4%
2008/
12/01 5.6% 1.7%
2009/
01/01 6.0% 1.8%
2009/
02/01 6.4% 1.9%
2009/
03/01 6.6% 2.1%
2009/
04/01 6.5% 2.4%
2009/
05/01 6.9% 2.6%
2009/
06/01 6.9% 2.8%
2009/
07/01 6.2% 3.2%
2009/
08/01 6.3% 3.3%
2009/
09/01 6.2% 3.6%
2009/
10/01 6.4% 3.7%
2009/
11/01 5.9% 3.8%
2009/
12/01 5.9% 4.0%
2010/
01/01 5.8% 4.1%
2010/
02/01 5.8% 4.0%
2010/
03/01 5.6% 4.3%
2010/
04/01 5.3% 4.4%
2010/
05/01 5.3% 4.3%
2010/
06/01 5.3% 4.3%
2010/
07/01 5.2% 4.2%
2010/
08/01 5.4% 4.0%
2010/
09/01 5.5% 4.0%
2010/
10/01 5.5% 4.1%
2010/
11/01 5.6% 4.1%
2010/
12/01 5.2% 4.2%
2011/
01/01 5.2% 4.1%
2011/
02/01 5.1% 3.9%
2011/
03/01 4.9% 4.0%
2011/
04/01 5.1% 3.8%
2011/
05/01 5.0% 4.0%
2011/
06/01 5.1% 4.0%
2011/
07/01 5.0% 4.0%
2011/
08/01 5.1% 3.9%
2011/
09/01 5.0% 4.1%
2011/
10/01 5.1% 3.8%
2011/
11/01 4.9% 3.7%
2011/
12/01 4.9% 3.6%
2012/
01/01 4.7% 3.6%
2012/
02/01 4.8% 3.5%
2012/
03/01 4.8% 3.4%
2012/
04/01 4.8% 3.3%
2012/
05/01 4.7% 3.5%
2012/
06/01 4.8% 3.4%
2012/
07/01 4.9% 3.3%
2012/
08/01 4.9% 3.2%
2012/
09/01 4.6% 3.1%
2012/
10/01 4.7% 3.2%
2012/
11/01 4.6% 3.1%
2012/
12/01 4.8% 3.1%
2013/
01/01 4.9% 3.0%
2013/
02/01 4.6% 3.1%
2013/
03/01 4.6% 3.0%
2013/
04/01 4.7% 2.8%
2013/
05/01 4.7% 2.8%
2013/
06/01 4.8% 2.8%
2013/
07/01 4.6% 2.7%
2013/
08/01 4.5% 2.7%
2013/
09/01 4.5% 2.7%
2013/
10/01 4.7% 2.6%
2013/
11/01 4.4% 2.6%
2013/
12/01 4.1% 2.5%
2014/
01/01 4.2% 2.3%
2014/
02/01 4.2% 2.5%
2014/
03/01 4.3% 2.4%
2014/
04/01 4.1% 2.2%
2014/
05/01 4.1% 2.2%
2014/
06/01 4.0% 2.0%
EPI BRIEFING PAPER #381|AUGUST 8, 2014 PAGE 4
unemployed are so scarred and disconnected from labor markets that they effectively put no downward pressure on wage and price growth (i.e., they have become unemployable so they are essentially not competing for available jobs). This argument implicitly relies on believing that today’s elevated LTUR is largely “structural,” e.g., reflecting mismatches between workers’ skills or location with the skills or location of available jobs. Further, the argument is often presented as if the LTUR has been stubbornly unresponsive to the modest improvements in the overall economy in recent years.
If instead today’s elevated LTUR is simply a legacy of the very large rise in LTU that occurred during (and immediately after) the Great Recession, then this interpretation should not stand. Particularly, if the LTUR has over the course of the recovery actually fallen at a pace that matches or exceeds the pace that would be predicted by the historical relationship between it and other measures of macroeconomic health, this argues strongly against two key ideas: the idea that the long-term unemployed have metastasized into a group that is largely disconnected from labor markets, and the idea that measures to boost aggregate demand would not continue to reduce the long-term unemployment rate.
A key piece of evidence we will return to often in this report regards the behavior of wage and price inflation. The entire debate regarding the actual remaining degree of productive slack in the U.S. economy is a debate about whether or not further boosts to aggregate demand will spur more economic activity and employment or simply lead to an increase in nominal wages and prices. If elevated unemployment (especially long-term unemployment) since the Great Recession has evolved from cyclical to structural unemployment, then measures to boost demand will indeed just put upward pressure on prices and wages without spurring significant increases in activity and employment.
The rest of this report will consist of three sections. The first examines macroeconomic evidence outside of the labor market to assess the hypothesis that there remains a large gap between aggregate demand and potential supply. If evi- dence from outside the labor market indicates the presence of such a gap, then it seems quite likely that a large part of remaining labor market weakness is due to this demand shortfall. The next section examines whether labor market indicators point to a growing incidence of “structural” factors that are reducing the exit rate from unemployment and therefore increasing the share of the labor force that is long-term unemployed, which would support the notion that the LTU have hardened into a problem that is not solvable simply by boosting demand. The final section looks directly at the behavior of the unemployment rate and the long-term unemployment rate over the Great Recession and recovery to see whether there are changes in the historical relationship between these rates that would suggest that the long-term unemployed no longer constitute a reliable indicator of labor market slack.
Macroeconomic evidence from outside the labor market strongly suggests a large gap between demand and supply
A key reason why observers have begun to focus on the still-elevated LTUR is that they consider it a possible diagnostic for how much productive slack remains in the U.S. economy. This section examines the issue of slack using a number of indicators from outside the labor market.
Direct estimates of productive capacity
Figure B displays the most direct attempt to measure economic slack—the ratio of actual gross domestic product (GDP) to potential GDP (also known as overall capacity utilization) as measured by the Congressional Budget Office (CBO). Potential GDP is an estimate of how much the U.S. economy could produce if the unemployment rate was at
EPI BRIEFING PAPER #381|AUGUST 8, 2014 PAGE 5
FIGURE B VIEW INTERACTIVE on epi.org
Ratio of actual/potential GDP, 2000–2014
Note: Shaded areas denote recessions.
Source: Current Population Survey public data series
Actual/potential GDP
2000 2002 2004 2006 2008 2010 2012 2014
0.9 0.925 0.95 0.975 1 1.025 1.05
the lowest level consistent with stable inflation. The gap between actual and potential GDP (1 minus the ratio of actual to potential GDP) is the “output gap,” the most direct measure of the demand shortfall in the economy. Hence a falling ratio represents a rising output gap.
The figure shows that only about half of the historically large output gap between actual and potential GDP that devel- oped during the Great Recession has been closed. Further, even this shrinkage of the CBO-measured output gap may understate remaining slack. Traditionally, output gaps following recessions close as actual GDP grows faster than esti- mates of long-run trend growth that characterize potential GDP. But actual GDP has not grown faster than estimates of long-run trends that prevailed before the Great Recession. Instead, the CBO has progressively marked down its esti- mates of this long-run trend, as shown in Figure C.
It is hard to imagine that the CBO would decrease estimates of long-run trend growth for any other reason than for the influence of the Great Recession itself. Long-run economic growth trends generally reflect estimates of labor force growth and productivity (which is the product of investment in human and physical capital as well as technological improvement). Labor force growth absent persistent demand shortfalls should be determined by long-run demographic trends that are relatively easy to predict (and thus not likely a factor in subsequent ratcheting down of growth estimates).
This leaves productivity growth as a cause of the decreasing estimates. The decline in CBO estimates of potential output reflects in part the depressed capital investment in recent years—investment that was depressed precisely because of the
Quarter
Actual/
potential GDP 2000/
01/01 1.025 2000/
04/01 1.035 2000/
07/01 1.027 2000/
10/01 1.024 2001/
01/01 1.012 2001/
04/01 1.008 2001/
07/01 0.996 2001/
10/01 0.990 2002/
01/01 0.991 2002/
04/01 0.988 2002/
07/01 0.984 2002/
10/01 0.977 2003/
01/01 0.975 2003/
04/01 0.976 2003/
07/01 0.986 2003/
10/01 0.990 2004/
01/01 0.990 2004/
04/01 0.991 2004/
07/01 0.994 2004/
10/01 0.997 2005/
01/01 1.001 2005/
04/01 1.000 2005/
07/01 1.003 2005/
10/01 1.003 2006/
01/01 1.009 2006/
04/01 1.006 2006/
07/01 1.001 2006/
10/01 1.003 2007/
01/01 0.997 2007/
04/01 0.999 2007/
07/01 0.999 2007/
10/01 0.997 2008/
01/01 0.984 2008/
04/01 0.984 2008/
07/01 0.974 2008/
10/01 0.949 2009/
01/01 0.931 2009/
04/01 0.926 2009/
07/01 0.926 2009/
10/01 0.931 2010/
01/01 0.932 2010/
04/01 0.938 2010/
07/01 0.941 2010/
10/01 0.944 2011/
01/01 0.937 2011/
04/01 0.940 2011/
07/01 0.939 2011/
10/01 0.946 2012/
01/01 0.947 2012/
04/01 0.947 2012/
07/01 0.949 2012/
10/01 0.945 2013/
01/01 0.948 2013/
04/01 0.948 2013/
07/01 0.955 2013/
10/01 0.959 2014/
01/01 0.950 2014/
04/01 0.955
EPI BRIEFING PAPER #381|AUGUST 8, 2014 PAGE 6
