Cyclical or Structural?

Though Tim Dunne and Kyle Feem of the Cleveland Fed are cautious in their interpretation of the data presented in the graphs shown below, to me this looks like strong evidence that there is a large cyclical component to the unemployment problem:

The Employment Report and Displaced Workers, by Tim Dunne and Kyle Feem FRB Cleveland: Every two years, the Bureau of Labor Statistics surveys individuals about displacement from the workforce as part of the Current Population Survey. The Displaced Workers Survey asks workers, 20 years of age and older, about the nature and cause of any job displacement they have experienced in the last three years. For example, the January 2010 survey asks workers about job losses that occurred between January 2007 and December 2009, so the survey covers the most recent recession in its entirety. We compare the latest results to those of the 2002 survey, which included the 2001 recession, and the 2008 survey, which covers the three years prior to the current recession.

The survey reports focus on long-tenured workers—individuals who held their positions for three or more years prior to displacement. There were roughly 4 million long-tenured displaced workers in the 2002 survey, 3.6 million in the 2008 survey, and 6.9 million in the 2010 survey, reflecting the relative severity of the last recession. The long-tenured workers represent about 40 percent to 45 percent of all displaced workers in the three survey years.

In the January 2010 survey, re-employment rates averaged 48.8 percent, meaning that a little less than half of all long-tenured workers who experienced displacement over the 2007–2009 period are currently employed. Not surprisingly, these re-employment rates are well below the rates observed in the 2002 or 2008 surveys, where they were 63.4 percent and 67.1 percent, respectively. Moreover, since the proportion of workers that ended up out of the labor force is roughly the same in all three survey years, this means the proportion of displaced workers that are unemployed in 2010 is significantly higher than in the earlier surveys.

The Displaced Worker Survey also asks about the reason for the worker’s displacement, and in fact, only workers who respond that their plant or company closed or moved, that there was insufficient work, or that their position or shift was abolished are considered as displaced workers. During the last two recessions, there were marked differences in the reasons cited for displacement. In 2010, the most frequent response is insufficient work, whereas in 2002 it was the closing or moving of the plant or company. Responses from the 2008 survey (along with other recent nonrecession years) look similar to 2002. These different responses between 2010 and other survey years likely reflect the widespread nature of the aggregate shock that hit the economy in 2008 and 2009.

It may be tempting to interpret the data on reasons for displacement as evidence that cyclical effects, as opposed to structural effects, are primarily driving unemployment; however, we would be cautious in making that inference. The survey is asking workers about the reason for their displacement but not about impediments to finding a new position. Thus, the low re-employment rates could be driven by weak current demand, by structural factors in the labor market, or by a combination of the two.

Structural unemployment is often described by a skill-mismatch story—firms have vacancies and there are unemployed workers, but hiring is slow because the skills of the unemployed workers do not match well the requirements of the open positions. One potential source of skill mismatch is industry mismatch—unemployed workers have skills tied to the industry they lost their jobs in, while job openings exist in an industry to which their skills are not transferable. For example, in the current recession-recovery cycle, one might be concerned that workers in industries such as construction, durable goods manufacturing, and finance may be susceptible to such mismatch possibilities, as these industries experienced particularly large negative shocks, and workers might be forced to search in different industries for employment opportunities. This could result in lower than average re-employment probabilities for workers who lost positions from such hard-hit industries or sectors.

While re-employment rates are, unsurprisingly, lower in 2010 than in prior years across all industries, a closer look at the results from the 2010 survey shows that individuals who were displaced from the finance, insurance, and real estate industries actually have relatively high re-employment rates. Note that re-employment here measures employment in any industry and not necessarily re-employment in the industry where the job loss occurred.

Construction workers, on the other hand, have re-employment rates of 49.1 percent, similar to the overall average of 48.8 percent. Alternatively, workers who lost jobs in durable-goods industries have very low re-employment rates at this point—33.4 percent. Given the large restructuring that is occurring in the domestic auto industry, perhaps this low re-employment rate does reflect some structural aspect to unemployment. Still, while there is some evidence of increased variability in re-employment rates across industries in 2010 compared to early years, the overwhelming pattern is that re-employment rates have shifted sharply down across a broad range of industries.