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November 2014

The increased supply of underutilized labor from 2006 to 2014

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Types of unemployment

This section briefly discusses how changes in the U.S. labor market may have affected the different types of unemployment. The section does not consider the fall in the labor force participation rate of any of the groups discussed, except for those marginally attached to the labor force.

Economists have identified different types of unemployment: cyclical, structural, and frictional. Cyclical unemployment generally occurs when there is insufficient demand for labor. Structural unemployment usually occurs when there is a mismatch between the skills or location of unemployed workers and the skills required by, or location of, available jobs. Frictional unemployment occurs when people are between jobs or when those who have entered or reentered the labor force have not yet found work.42 This section considers cyclical and structural unemployment only.43

Estimates of the type of unemployment. Most economists attributed a majority of the increase in unemployment during and after the 2007–2009 recession to inadequate demand. However, as the national unemployment rate began to fall, some economists began to attribute more of the increase in unemployment to structural factors. For example, in a February 2012 report, CBO estimated that, in December 2011 (4 years after the start of the recession), 2.5 points of the 3.5-percentage-point increase in the unemployment rate were due to inadequate demand. Another 0.75 point was due to structural factors. CBO attributed the remaining one-quarter–point increase in unemployment to the effects of incentives from the extension of unemployment benefits.44

Five years after the start of the recession, CBO estimated that 1.0 point of the 2.8-percentage-point increase in the unemployment rate from December 2007 to December 2012 was due to structural factors.45 A year later, CBO estimated that, of the approximately 2.0-percentage-point increase in the unemployment rate from the end of 2007 to the end of 2013, 1.0 point was due to inadequate demand and 1.0 point was due to structural unemployment.46

People employed part-time for economic reasons. Some of the increase in the number of underemployed during and after the recession may have been due to inadequate demand. From the 12-month period before the recession to the year ending June 2014, the number of underemployed increased by an estimated 3.6 million. For two reasons, much of this increase may have been due to inadequate demand. First, the number of underemployed increased at the same time as the rise in the number of unemployed. (See figure 1.) Second, even though some people are working part time, they presumably have the skills for the jobs they hold. That is, there is no mismatch between their skills and their jobs. As demand for labor continues to increase, however, the skills of some of the underemployed or the locations in which they work may not match the skills or locations of openings for full-time jobs. 

The marginally attached. The increase in the number of people marginally attached to the labor force may have been due to either inadequate demand or structural factors. Most discouraged workers (63.0 percent) said that they were not actively looking for work because they could not find work earlier. Another 31.0 percent said that they believed that there was no work available in their occupation or in the location where they lived. Among “others” marginally attached to the labor force, 26.7 percent said that they were not actively looking for work because they were in school or they were receiving other training. Another 20.2 percent said that they were not in the labor force because of family responsibilities. (See table 1.) With a greater demand for labor, those who are marginally attached to the labor force may enter or reenter the labor market. Many, if not most, of them may find work. But even with an increase in the demand for labor, some individuals may not find jobs that match their skills or may not live where employers are hiring. 

Notes

42 See Lloyd G. Reynolds, Stanley H. Masters, and Colletta H. Moser, Labor economics and labor relations, 10th ed. (Englewood Cliffs, NJ: Prentice-Hall, 1991), pp. 278–284; and Ronald G. Ehrenberg and Robert S. Smith, Modern labor economics: theory and public policy, 7th ed. (Reading, MA: Addison-Wesley, 2000), pp. 574, 581. For a discussion of alternative ways to define structural unemployment, see Edward P. Lazear and James R. Spletzer, The United States labor market: status quo or a new normal? Working Paper 18386 (Cambridge, MA: National Bureau of Economic Research, September 2012), pp. 1–3, http://www.nber.org/papers/w18386. For a discussion of methodological issues in measuring structural unemployment, see Peter A. Diamond, Cyclical unemployment, structural unemployment, Working Paper 18761 (Cambridge, MA: National Bureau of Economic Research, February 2013), http://www.nber.org/papers/w18761.

43 For a discussion of different explanations for the persistence of unemployment after the past three recessions, see Olivier Coibion, Yuriy Gorodnichenko, and Dmitri Koustas, Amerisclerosis? The puzzle of rising U.S. unemployment persistence, Working Paper 19600 (Cambridge, MA: National Bureau of Economic Research, October 2013), http://www.nber.org/papers/w19600.

44 Understanding and responding to persistently high unemployment (U.S. Congressional Budget Office, February 16, 2011), p. 8, http://www.cbo.gov/publication/42989. For a discussion of the effects of receiving unemployment benefits on unemployment, see Henry S. Farber and Robert G. Valletta, Do extended unemployment benefits lengthen unemployment spells: evidence from recent cycles in the U.S. labor market, Working Paper 19048 (Cambridge, MA: National Bureau of Economic Research, May 2013), http://www.nber.org/papers/w19048; The slow recovery of the labor market (U.S. Congressional Budget Office, February 2014), pp. 9–10, https://www.cbo.gov/sites/default/files/45011-LaborMarketReview.pdf; and Jesse Rothstein, The labor market four years into the crisis: assessing structural explanations, Working Paper 17966 (Cambridge, MA: National Bureau of Economic Research, March 2012), pp. 27–28, http://www.nber.org/papers/w17966.

Increased spending on other safety net programs, such as the Supplemental Nutrition Assistance Program (SNAP, formerly known as Food Stamps) and Medicaid, during and after the 2007–2009 recession also may have affected work incentives. (See Casey B. Mulligan, Do welfare policies matter for labor market aggregates? Quantifying safety net work incentives since 2007, Working Paper No. 18088 (Cambridge, MA: National Bureau of Economic Research, May 2012), http://www.nber.org/papers/w18088.)

45 The budget and economic outlook: fiscal years 2013 to 2023 (U.S. Congressional Budget Office, February 5, 2013), p. 38, http://www.cbo.gov/publication/43907.

46 The budget and economic outlook: fiscal years 2014 to 2024 (U.S. Congressional Budget Office, February 4, 2014), p. 37, http://www.cbo.gov/publication/45010.

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About the Author

Gerald Mayer
gmayer1@comcast.net

Gerald Mayer is an analyst in labor policy at the Congressional Research Service, Library of Congress, Washington, DC.