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New evidence on cyclical and structural sources of unemployment

  • Zinzhu Chen
  • Prakash Kannan
  • Prakash Loungani
  • Bharat Trehan

We provide cross-country 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”), monetary and fiscal policies, and the uncertainty effects emphasized by Bloom (2009). Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25 percent. For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2011-17.

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Date of creation: 2011
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Handle: RePEc:fip:fedfwp:2011-17
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