Presentation for the Conference  on Long‐Term Unemployment in Industrial Countries,University of Wisconsin Madison April 28 2011University of Wisconsin‐Madison, April 28, 2011 

LONG‐TERM UNEMPLOYMENT:CAUSES COSTS CURESCAUSES, COSTS, CURES

PRAKASH LOUNGANI, INTERNATIONAL MONETARY FUND | APRIL 28, 2010 

VIEWS EXPRESSED ARE THOSE OF THE PRESENTER AND SHOULD NOT BE ASCRIBED TO THE IMF.

I thank Larry Ball and Daniel Leigh for many useful discussions; Joao Jalles for  excellent inputs on the topic; and Jair Rodriguez for outstanding research assistanceon the topic; and Jair Rodriguez for outstanding research assistance. 

OutlineOutline

Facts

CuresC Costs CuresCauses Costs

Forecast

Snapshot of Long‐Term l ( )Unemployment (LTU)

8.0

5 0

6.0

7.0Long-term Unemployment Rate, 2010Q3

3.0

4.0

5.0

0 0

1.0

2.0

0.0

Facts

Increase in LTU d hduring the Great Recession 

7.0

4.0

5.0

6.0 Long-term Unemployment Rate Change 2010-07

1 0

2.0

3.0

-1.0

0.0

1.0

-2.0

Facts

U.S.: the Epicenter of the lUnemployment Crisis

Number of Unemployed People 2010 (Millions)

Japan, 3.3

Number of Unemployed People, 2010 (Millions)

Spain, 4.7 France, 2.8

Other Advanced Countries, 6.7

Italy, 2.1

United States, 14.8 Total: 39.8

Facts

The Distribution of MiseryThe Distribution of Misery

Unemployed for 27 Weeks and Over, 2009 (Millions of people)

Germany, 2.0

Japan, 1.5

France, 1.4

p y , ( p p )

Spain, 2.1

Italy, 1.2

Other Advanced Countries 2 1

p ,

United Kingdom, 1.1

United States, 4.5Countries, 2.1

Total: 15.8

Facts

“It’s Aggregate Demand, Stupid”It s Aggregate Demand, Stupid

Demand Drop is the Major CauseDemand Drop is the Major Cause7

SpainIreland

5

6

7-10

Cha

nge

United States

Portugal 2

3

4

ploy

men

t, 20

07

Greece United KingdomItaly

DenmarkBelgiumFrance

SwedenFinland

Netherlands0

1

2

g-Te

rm U

nem

p

AustriaNetherlands

Germany-2

-1

12 10 8 6 4 2 0 2

Long

Causes

-12 -10 -8 -6 -4 -2 0 2GDP % Change, 2007-10

Stresses in the construction sector

10

-10

0Construction Employment Change, 2008 to 2010Q2

-30

-20

-40

30

-50

xxx

Credit and UnemploymentCredit and Unemployment7

IrelandSpain

5

6

Cha

nge

United States3

4

men

t, 20

07-1

0

Greece

Portugal

United Kingdom

2

3

rm U

nem

ploy

m

Belgium

FinlandFrance

ItalyDenmark

Sweden

0

1

-10 -5 0 5 10 15 20

Long

-Ter

Causes

-10 -5 0 5 10 15 20Real Credit to Private Sector, 2007-10 Change

Structural factors also at workStructural factors also at work0.20

Dispersion Index (12 months moving average)

0.16

0.18

Dispersion Index (12 months moving average)

0.10

0.12

0.14

0.06

0.08

0.02

0.04

Causes

Response on LTU to structural shockResponse on LTU to structural shock0.30

Long Term Unemployment Response to Dispersion Shock

0.20

0.25

Long-Term Unemployment Response to Dispersion Shock

0.15

0.05

0.10

-0.05

0.00

Causes

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Bottom‐line: cyclical vs. structuralBottom line: cyclical vs. structural Cyclical Structural

0.8

1.0

0.6

0.4

0.0

0.2

Causes

Unemp. Rate Up to 5 weeks 5 to 14 weeks 15 to 26 weeks 26+ weeks

Job loss lowers earningsJob loss lowers earnings

Costs

Earnings Losses of Men in stable jobs at and around job separation (t=0) in 1000 USD, from von Wachter et al. (2009)

Job loss raises odds of mortality

• Effects on health (Sullivan, von Wachter 2009): Persistent impacts on health: increase of risk of heart-attack, reduced life expectancy. Graph shows marginal effect of displacement on odds of mortality

Costs

Dwindling hopes of finding a jobDwindling hopes of finding a job

Costs

Policy Responses b l d– a bit more complicated

What to avoidWhat to avoid

Monetary and Fiscal Policy

An inadequate response …response …

Cyclical Unemployment

Structural Unemployment

… turns one 

Cures

into the other

What to doWhat to do

Monetary and Fiscal Policy

Structural Policies

Fi l d

A robust 

Fiscal and credit policies can help

response

Cyclical Unemployment

Structural Unemployment

Cures

• Supportive of recovery;• Ready to act if recovery

•Medium‐term consolidation, but not too  Ready to act if recovery 

faltershasty or too harsh

Fiscal PolicyFiscal Policy Monetary Monetary PolicyPolicy

Financial Sector Financial Sector PoliciesPolicies

Active Labor Active Labor Market PoliciesMarket Policies

•• Financial repair and reform so credit is flowing again

•Maintain UI benefits (how long?)•Short‐term work: maintain or phase out?•Dual employment system: notDual employment system: not working•Hiring subsidies: yes, but how to design?

Forecasts of unemployment, b d tiby duration

2 1

2.2

2.3 US: unemployment (<5 weeks, percent)

Actual2.4

2.6

2.8 US: unemployment (5 -14 weeks, percent)

Actual

1.8

1.9

2.0

2.1

Predicted

1.6

1.8

2.0

2.2Predicted

1.5

1.6

1.7

1.0

1.2

1.4

1.5

2.0

2.5US: unemployment (15-26 weeks,

percent)

Actual

Predicted

2 5

3.0

3.5

4.0

4.5 US: Long-term unemployment (>26 weeks, percent)

Actual

Predicted

0.5

1.0

0.5

1.0

1.5

2.0

2.5

Forecast

0.0 0.0

Forecasts of U.S. unemployment rateForecasts of U.S. unemployment rate

11 US: unemployment

9

10

7

8 Actual

Predicted

WEO

6

7Consensus forecast

4

5

Forecast