Paul Krugman: How to Listen to Financial Markets
Liveblogging World War II: March 23, 1941

DeLong Smackdown Watch with Many, Many Graphs: David Altig Edition

Macroblog The unemployment puzzle or at least one of them

I'm not sure a bubble collapse or an episode of financial distress counts as a "structural shock." But, then, I am not sure that it does not. I am confused.

David Altig writes:

macroblog: The unemployment puzzle--or at least one of them: I am sympathetic to [DeLong's] view as the dynamics of employment recoveries do seem much different in the post-1990 era than in the pre-1990 era. To provide yet another example, on average it took 10 months to recover all the jobs lost during the recessions of the period between 1950 and 1989. In contrast, it took 23 months to recover the jobs lost following the 1990–91 recession and 38 months following the 2001 recession. Right now we are 20 months from the official end of our most recent contraction and still almost 5.5 percent below the pre-recession employment peak. (A stark graphical reminder from Calculated Risk is featured at Economics Roundtable.) What's more, the mechanism DeLong appeals to rings true. That is, prior to the 1980s, downturns in the economy were dominated by intentional tightening by the Federal Reserve to contain inflation. In the post-Volcker era, however, structural shocks appear to be the dominant story.

But the deeper one digs into the labor market facts, the deeper the questions become. Let me offer up an old macroblog favorite, the Beveridge curve. We have noted in the past that the Beveridge curve—which measures the relationship between the unemployment rate and job openings created by businesses (or vacancies)—seems to have shifted outward over the course of this recovery.... My view has been that this shifting of the Beveridge curve relationship represents structural issues in the U.S. labor market. A counterargument has been that such shifting is typical of the early phases of a recovery. And if the 1990-91 and 2001 recessions are the best analogs to the current cycle, we might well expect the relationship between job availability and unemployment to return to the prerecession norm.... The fact that all the points highlighted in green lie to the left of the points highlighted in red means that, for a given number of job openings, unemployment rates were lower during most of the past decade than they were in the 1990s. And there is certainly no evidence that outward shifts in the Beveridge curve are permanent.

Here, though, is where the search for unified business cycle theories gets a little tough. The return of the Beveridge curve to its prerecession norm is a distinctly post-1980 phenomenon. Excepting the 1960–61 episode, the recessions in the 1950–80 era are consistently associated with seemingly permanent rightward shifts in the Beveridge curve:

Macroblog The unemployment puzzle or at least one of them 1

On the other hand, the aftermath of the inflation-fighting 1981–82 recession represented a clear shift, as the vacancy/unemployment relationship improved dramatically (albeit slowly):

Macroblog The unemployment puzzle or at least one of them 2

How can we explain, then, that the supposedly demand-driven recessions of the pre-1990 era were associated with seemingly structural changes in the Beveridge curve relationship (in the "wrong" direction prior to 1980 episodes, in the "right" direction after the inflation-wringing contraction of 1981–82).

And what about this time around? Here's where we stand:

Macroblog The unemployment puzzle or at least one of them 3

Is the recent shift in the Beveridge curve here to stay, or transitory as appears to have been the case in the last two recessions?

Can I get back to you on that?

I had always held two contradictory views of the 1960-2000 moves of the Beveridge Curve. The first was that it was due to the coming into the labor force of the baby boom generation--the stresses of finding places for so many young workers pushes the Beveridge Curve out in the years up to 1980, and that outward push is reversed as the baby boomers age and begin to understand what is what. The second was that it was due to the inflation of the 1970s degrading the efficiency of the labor market pricing mechanism.