Unemployment: Is it Structural or Hysteresis?

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By Barbara Cohen
Chief Information Officer, ShadowTraders

Last Thursday, April 12th, the weekly unemployment claims report was released. The Number soared from 367k the week before to 380k, yet what had been forecast was a drop to 355k. What made this number so concerning was that, not only did the number rise, but that unemployment claims are based upon the prior week, and the prior week was Good Friday when government offices were closed. That meant that the number was based on 4 work days not 5. At this point, the question becomes, is unemployment now structural or is it still a result of the 2008 recession (hysteresis).

Structural unemployment occurs when the jobs that are available to be filled no longer match the skills and locations of the workers looking for employment. Structural unemployment normally occurs as a result of a changing labor market, such as with manufacturing, where manual labor is replaced by automation. There are now somewhere in the area of 3.4 million job openings nationwide in the United States. In a survey conducted by the National Federation of Independent Business, over a third of small business owners said they tried to hire someone in the last several months but were unable to find candidates with the appropriate skills. This is especially worrisome given that small businesses pay nearly 45% of the total U.S. private payroll and employ about half of all private sector employees.

Hysteresis occurs after there has been some economic shock, such as the 2008 financial meltdown, which reduced the overall size of the nation's workforce. With continued high unemployment, more workers begin to adjust, and thereby become accustomed to a lower standard of living, not trying to achieve their higher previous level. There is also the social aspect of long duration unemployment, as if it is now socially acceptable to be or remain unemployed. The stigma of unemployment has lost its shock value. The unemployment rate in the US has declined over the past few months from a peak of 10%. But does the decline mean that a larger proportion of Americans are back at work, or is it because many people have simply given up looking. The unemployment participation rate in 2009 was 65%, today it is roughly the same, 64%. The availability of jobs is not that much different than it was 2 years ago, yet 2.4 million workers have still not joined the labor force.

In her speech, "The Economic Outlook and Monetary Policy" delivered at the Money Marketers Dinner Meeting, in New York on Wednesday, April 11th, Federal Reserve Governor Janet Yellen stated, "While I do not see much evidence of any significant increase in structural unemployment so far, I am concerned that structural unemployment could increase over time if the labor market heals too slowly--a phenomenon known as hysteresis. An exceptionally large fraction of those now unemployed--more than 40 percent--have been out of work for six months or more. My concern is that individuals with such long unemployment spells could become less employable as their skills deteriorate and as they lose their connections to the labor market."

The jury is still out on unemployment, structural or hysteresis. Either way, the increase in weekly unemployment claims is disheartening, especially given the previous Friday's Non-Farm Employment report only showed an increase of 120k jobs, down from the forecast 207k.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Economy , Careers , US Markets

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