Cyclical or Structural? Evidence on the Sources of U.S. Unemployment

Abstract

We provide evidence on the relative importance of cyclical and structural factors in explaining unemployment, including the sharp rise in U.S. long-term unemployment during the Great Recession of 2007–09. About 75 % of the forecast error variance of unemployment is accounted for by cyclical factors—real GDP changes (“Okun’s Law”) and monetary and fiscal policies. Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25 %. For long-term unemployment the split between cyclical and structural factors is closer to 60–40, including during the Great Recession. Examination of the industry-level stock returns suggests that adverse shocks to the construction sector and, to a lesser extent, the finance sector were responsible for the increase in structural unemployment. The Great Recession appears similar to the recession of 1973–75, as sectoral shocks played a large role at that time as well.