Unemployment rate why is it so high

Skip to content Readability Tools. Reader View. Dark Mode. High Contrast. Reset All. Publications Why is the unemployment rate so high, and does it fully capture labor market weakness? January Chart 1 There is considerable slack in the economy For the actual output measure, economists use real inflation-adjusted gross domestic product GDP , which is calculated by the Bureau of Economic Analysis BEA.

Sharply reduced economic activity caused extensive job losses Businesses laid off workers during the recession amid weakening demand for goods and services. Interpreting high unemployment Chart 3 illustrates two measures of the unemployment rate versus a commonly used benchmark measure. Chart 3 The blue line shows the unemployment rate, which measures the share of persons who do not have a job but are willing, able, and actively seeking one the "unemployed" as a percentage of the total persons who of are willing and able to work, regardless of their employment status the "labor force".

Broad hardship: Unemployment is lasting longer One possible explanation for why there is an increasing share of potential workers who are falling outside the most commonly used definition of unemployed is because the duration of unemployment spells is increasing on average, it takes longer to find a job.

Chart 5 provides some evidence in favor of this: Chart 5 Chart 5 shows that the share of workers who have been unemployed for an extended period - six months or more - has risen sharply since the recession started. Conclusion As U. For previous Dr.

Econ articles on unemployment, see: Dr Econ. End Notes 1. In short, the Phillips curve has an unfavorable location in the unemploymentinflation diagram, passing far above and to the right of the point of low unemployment and wage stability. There are many interesting ways to examine this problem; my purpose in this paper is to study it only in the way suggested by the title.

That is, I will look into the nature of the unemployment that remains when labor markets are reasonably tight and the economy seems to be at full employment. Most of my data are observations on individuals, collected in a variety of surveys, rather than macroeconomic aggregates. The Bureau of Labor Statistics attributes that to a "continued resumption of economic activity that had been curtailed in March and April due to the coronavirus pandemic and efforts to contain it.

The unemployment rate may not be the most accurate indicator of financial stress at the moment, however, Woodbury said. A recent federal financial-relief law greatly increased unemployment benefits for out-of-work Americans.

While the unemployment rate right now is elevated, federal policy "has acted very quickly to try to head off a lot of the hardship that would otherwise result," Woodbury said.

Of course, many Americans have struggled to access unemployment benefits amid record volume and administrative delays. In addition, the unemployment rate includes workers temporarily laid off or furloughed. These workers are technically still attached to an employer and can return to work quickly if business rebounds. That suggests the current unemployment picture could potentially reverse quickly if the job losses don't become permanent.

The unemployment rate also doesn't include the share of Americans who dropped out of the labor force because they were discouraged and decided not to look for work, for example. The youth disadvantage is strongly and inversely affected by the business cycle: when an economy is expanding, its youth unemployment rate decreases more than the average, while it increases more than average when an economy is contracting.

A study from supports this, by showing that the youth unemployment rate is particularly sensitive to economic and financial crises [7].

A mix of factors explain this counter-cyclical nature. First, the aforementioned LIFO principle plays a role, as it disproportionately impacts young workers. Second, the LIFO principle is amplified by policies that reduce the cost of firing, either for all workers, as in the Anglo-Saxon countries, or primarily for young workers, as is the case in countries that have implemented two-tier reforms that only apply to the new hires, such as most south and east European countries.

If the majority of new hires are made through temporary contracts, it is easy to discontinue such contracts by simply not renewing them. This leads to a situation in which many youth cycle rapidly in and out of employment. In addition to macroeconomic factors, one should consider more structural factors.

In fact, differences in the youth disadvantage across countries are stubbornly persistent, and this is typically explained by different institutional settings. Structural factors are directly affected by the way in which SWT systems are organized and, indirectly, depend on policies regarding the education system and employment protection legislation.

This gap is the main reason firms prefer adults to young people. While general competences and work experience are gained quite quickly in any type of job and are easily transferred to any other type of job, job-specific competences and specific work experience can only be gained and used in the specific job for which they apply.

Moreover, these specific traits require a long period of time to acquire. Examples of general competences acquired through any kind of work experience e. Examples of job-specific work experience are: teaching pupils for a teacher or professor, preparing a summons for a barrister, or preparing a tax return for a financial advisor.

Both general and job-related competences are subject to market failure. One study dating from the s showed that it is not convenient for firms to provide general training because the competences acquired can be easily transferred to a competitor when workers change jobs [8]. Consequently, firms will tend to transfer the cost of training to workers via lower wages, unless the state offers financial or practical training support.

Likewise, job-specific competences tend to generate market failures and thereby require intervention from the state to be fully developed.

As these competences are acquired through long periods of work experience, job-specific training is unlikely to be provided to workers on temporary contracts. Neither workers nor firms have sufficient incentives to invest in this form of training when contracts are temporary.

It is therefore not uncommon that workers wishing to start a liberal profession, for instance, will find it hard to receive the necessary training from firms.

One way to overcome this problem is by means of long-term contracts and wage structures that increase with job tenure to make workers more faithful to their employer [9]. Temporary work can be a tool to provide general but not firm-specific human capital. Due to their lower cost to firms, temporary contracts could incentivize them to provide on-the-job training to build general human capital, because workers will pay the cost of training via lower than market wages.

Toward this end, firms tend to offer increasing wages to their employees for the exact purpose of incentivizing them to remain with the firm for this sufficiently long period of time. Lower wage costs, which are attached to fixed-term temporary contracts, might be sufficient to allow young people to acquire the training that they need to overcome their gap in general, but not their gap in job-specific human capital.

In other words, while temporary contracts may incentivize employers to hire young people, thereby imparting them with general skills, these arrangements will not lead to the development of job-specific competences. This is because firms worry that they will not benefit from the returns to job-specific competences that young workers would acquire if given job-specific training while under temporary contracts.

The state plays a critical role in helping young people acquire all three of the key components of human capital. However, the way in which such help is provided differs dramatically across countries and the mix of institutions involved is highly complex; hence, it is important to identify different regimes or models used in different countries.

SWT systems differ on whether it is the mission of the education system itself to provide work-related competences as in dual education systems or whether young people are expected to acquire these competences after completing their education as in sequential education systems [5].

With their flexible labor markets, Anglo-Saxon countries provide the best example of sequential education systems, in which young people are able to acquire their work-related competences directly through work. If the labor market is sufficiently flexible, young people are able to move from one job to the next in a relatively quick and easy way, which allows them to gain a variety of work-related competences fairly quickly. To understand the importance of labor flexibility to reduce the experience gap of young people, consider a simple example.

Another important feature of Anglo-Saxon countries is their aversion to nationwide wage-setting mechanisms. Such practices tend to equalize wages across age groups, forcing firms to pay equal wages for different human capital and skill levels. In the absence of these nationwide policies, the ability to pay lower entry wages for young people incentivizes firms to hire them.

In Germany, the majority of young people acquire work-related competences during school, through their apprenticeship contract. Professional universities are also provided for graduates from the apprenticeship system. The main limitations of the German approach are to be found in the excessively specific knowledge of workers, which could be an obstacle in periods of dramatic structural change.