More on UE

Handout 3 (Figures 1 and 2) show the actual and natural rates of unemployment for the last 113 years in the U.S. (Figure 2 does that; Figure 1 concentrates only on the post-WWII actual UE rate in the U.S.) Note the wide swings in the actual unemployment rate: the Great Depression, the WWII boom, and the more recent recessions of 1973/74, the early 1980s, and the early 1990s. These wide swings are in sharp contrast to the stability of the natural rate. Note also how the natural rate drifted upwards since the 1960s only to drift back down a bit in the 1980s and 1990s. Interestingly, the increase in the natural unemployment rate was much greater in other industrialized countries, with the notable exception of Japan. In Germany, for instance, the unemployment rate was 3.7 percent in 1978, but had risen to 9.2 percent by 1994. Economists attribute much of this rise to an increase in its natural rate [See the “In the News” box on pages 624-625 for more on German UE. Clearly reunification issues after 1989 have made Germany a difficult, but interesting case.] Other industrialized economies sustained similar increases over this period: United Kingdom, 4.5% to 9.2%; France, 5.2% to 12.4%; and Canada 8.4% to 10.4%.

Finally, if we look at both the duration of someone’s time on the UE roles (spell) as well as who is responsible for the total number of weeks of UE in a given year, we find that most spells of UE are short but most of the total weeks of UE in a given year are generated by the long term unemployed. Is this really a paradox?

Well, the example in the text illuminates this possibility extremely well:

4 people are at the UE office every week for a year. 3 of them are always the same person. The 4th changes each week. So, in total, you observe 55 spells of UE (the 3 stalwarts plus the 52 people in the rotating position) and 208 weeks of UE that year (4 people each week for 52 weeks). Let’s examine our paradox:

52 of the 55 spells of UE (roughly 95%) are exactly 1 week in duration, so the statement that most spells of UE are short certainly holds.

156 of the 208 weeks of total UE (75%) are due to the long term unemployed, supporting that part of our paradox as well.

Thus, even though this example may seem contrived, it illustrates the importance of the long term unemployed in understanding public policies designed to combat unemployment. Policies enacted to reduce the UE rate, for example, by reducing the opportunity cost of being unemployed may be less appropriate for combating long term unemployment issues….and if they lengthen the average UE spell, they might contribute to more people becoming long term unemployed.