Presentation for the Conference on Long‐Term Unemployment in Industrial Countries,
University of Wisconsin Madison April 28 2011
University of Wisconsin‐Madison, April 28, 2011 LONG‐TERM UNEMPLOYMENT:
CAUSES COSTS CURES
CAUSES, 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 assistance
on the topic; and Jair Rodriguez for outstanding research assistance. Outline
Facts
C
Causes
Costs
Forecast
Cures
Snapshot of Long‐Term Unemployment (LTU)
l
( )
8.0
7.0
Long-term Unemployment Rate, 2010Q3
6.0
50
5.0
4.0
3.0
2.0
1.0
00
0.0
Facts
Increase in LTU d
during the Great Recession h
7.0
6.0
Long-term Unemployment Rate Change 2010-07
5.0
4.0
3.0
2.0
10
1.0
0.0
-1.0
-2.0
Facts
U.S.: the Epicenter of the Unemployment Crisis
l
Number of Unemployed People
People, 2010 (Millions)
Japan, 3.3
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 Misery
The Distribution of Misery
Unemployed
p y for 27 Weeks and Over,, 2009 (Millions
(
of p
people)
p )
Japan, 1.5
Germany, 2.0
France, 1.4
Italy, 1.2
Spain,
p , 2.1
United Kingdom, 1.1
Other Advanced
Countries 2.1
Countries,
21
United States, 4.5
Total: 15.8
Facts
“It’s
It s Aggregate Demand, Stupid
Aggregate Demand, Stupid”
Demand Drop is the Major Cause
Demand Drop is the Major Cause
Long
g-Term Unemp
ployment, 2007
7-10 Change
7
6
Spain
Ireland
5
4
United States
3
Portugal
2
United Kingdom
Greece
Italy
Denmark
1
Belgium
France
Sweden
Finland
Netherlands
0
Austria
-1
Germany
-2
-12
12
-10
10
-8
8
-6
6
-4
4
GDP % Change, 2007-10
-2
2
0
Causes
2
Stresses in the construction sector
10
Construction Employment Change, 2008 to 2010Q2
0
-10
-20
-30
30
-40
-50
xxx
Credit and Unemployment
Credit and Unemployment
7
6
Long-Terrm Unemploym
ment, 2007-10 Change
Spain
Ireland
5
4
United States
3
Portugal
United Kingdom
Italy
Denmark
France
2
Greece
1
Belgium
Sweden
Finland
0
-10
-5
0
5
10
Real Credit to Private Sector, 2007-10 Change
15
20
Causes
Structural factors also at work
Structural factors also at work
0.20
Dispersion Index (12 months moving average)
0.18
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
Causes
Response on LTU to structural shock
Response on LTU to structural shock
0.30
Long Term Unemployment Response to Dispersion Shock
Long-Term
0.25
0.20
0.15
0.10
0.05
0.00
-0.05
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Causes
19
20
Bottom‐line:
Bottom
line: cyclical vs. structural cyclical vs. structural
Cyclical
Structural
1.0
0.8
0.6
0.4
0.2
0.0
Unemp. Rate
Up to 5 weeks
5 to 14 weeks
15 to 26 weeks
26+ weeks
Causes
Job loss lowers earnings
Job loss lowers earnings
Earnings Losses of Men in stable jobs at and around job separation (t=0) in 1000 USD, from von Wachter et al. (2009)
Costs
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 job
Dwindling hopes of finding a job
Costs
Policy Responses – a bit more complicated
b
l
d
What to avoid
What to avoid
Monetary and Fiscal Policy
An inadequate response …
response …
Cyclical Unemployment
Structural Unemployment
… turns one into the other
Cures
What to do
What to do
Monetary and Fiscal Policy
Structural Policies
Fiscal and Fi
l d
credit policies can help
A robust response
Cyclical Unemployment
Structural Unemployment
Cures
• Medium‐term consolidation, but not too hasty or too harsh
•Maintain UI benefits (how long?)
•Short‐term work: maintain or phase out?
Dual employment system: not employment system: not
•Dual
working
•Hiring subsidies: yes, but how to design?
• Supportive of recovery;
• Ready to act if recovery Ready to act if recovery
falters
Fiscal Policy
Monetary Policy
Active Labor Market Policies
Financial Sector Policies
•
• Financial repair and reform so credit is flowing again
Forecasts of unemployment, b d ti
by duration
2.3
US: unemployment (<5 weeks, percent)
2.8
2.6
2.2
Actual
US: unemployment (5 -14 weeks,
percent)
Actual
2.4
21
2.1
Predicted
Predicted
2.2
2.0
2.0
1.9
1.8
1.8
1.6
1.7
1.4
1.6
1.2
1.5
1.0
2.5
2.0
US: unemployment (15-26 weeks,
percent)
4.5
4.0
Actual
3.5
Predicted
3.0
US: Long-term unemployment (>26
weeks, percent)
Actual
Predicted
1.5
25
2.5
2.0
1.0
1.5
0.5
1.0
0.5
0.0
0.0
Forecast
Forecasts of U.S. unemployment rate
Forecasts of U.S. unemployment rate
US: unemployment
11
10
9
8
Actual
Predicted
7
WEO
Consensus forecast
6
5
4
Forecast