How Much Cyclical vs. Structural Unemployment?
This is a question that has raged in the blogosphere for some time now. And here is an answer from Prakash Loungani et al. (2011): We provide cross-country evidence on the relative importance of cyclical and structural factors in explaining unemployment, including the sharp rise in U.S. long-term unemployment during the Great Recession of 2007-09. About 75% of the forecast error variance of unemployment is accounted for by cyclical factors-real GDP changes (Okun‘s Law), monetary and fiscal policies, and the uncertainty effects emphasized by Bloom (2009). Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25 percent. For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession. This is a little less than Scott Sumner's 70-30 split, but is still far more weighted toward cyclical factors than Arnold Kling's Recalculation the...