Firms’ deleveraging and the persistence of unemployment
Tommaso Monacelli, Vincenzo Quadrini, Antonella Trigari 18 October 2011
Three years after the beginning of the Great Recession, the US unemployment rate remains at 9%, double its pre-crisis level. This column suggests the credit crunch may be behind this high number. It argues this is not because lower debt impairs the hiring ability of firms, but because it places firms in a less favourable bargaining position, allowing workers to negotiate higher wages, and thus reducing employment.
The recent financial turmoil has been associated with a depressed state of the labour market. The unemployment rate in the US has risen from 5.5% to more than 10% and continues to remain close to 9% three years after the beginning of the recession (see Figure 1).
Figure 1. Unemployment rate
Note: percent, civilian unemployment rate. Source: BLS
Labour markets Macroeconomic policy
US, unemployment, Great Recession
Market psychology, high unemployment and rational bubbles
Roger E. A. Farmer 18 August 2011
One explanation for the 2007-09 global crisis is that consumers, markets, and politicians were gripped by “irrational exuberance” that led them to believe the record-high house prices and stock prices were sustainable. This column proposes a new explanation based on rational behaviour and microeconomic theory. It argues that however high stock prices rise, there is always an equilibrium in which they can rise further.
According to a popular narrative (e.g. Shiller 2008), the Great Recession was caused by a bubble in the housing market. When the bubble burst, households were left with mortgages that exceeded the values of their houses. When they stopped spending, the resulting fall in consumer demand triggered an increase in unemployment. The drop in housing wealth was accompanied by a stock market crash, precipitated by the failure of Lehman Brothers in the fall of 2007.
Although this narrative fits the facts, it poses two major difficulties for conventional microeconomic theory.
Frontiers of economic research
unemployment, psychology, bubbles, rational expectations
The allocation of time over the business cycle
Erik Hurst, Loukas Karabarbounis, Mark Aguiar 17 August 2011
When jobs are scarce, what else is there to do? This column looks at data from the American Time Use Survey (ATUS) and finds that roughly 30% to 40% of time not spent working is put towards increased “home” production, 30% of time is allocated to increased sleep time and increased television watching, while other leisure activities make up a further 20% of the foregone market work hours.
After years of steady growth, the global economy has turned and so too has the interest in unemployment (see recent examples on this site Smith 2011 and Cingano and Rosolia 2011). The rising levels of unemployment around the world bring up some key questions:
US, unemployment, recession, jobs, time management
The ins and outs of UK unemployment
Jennifer Smith 18 July 2011
Labour-market policy can try to make it easier to get hired or harder to get fired. This column asks which of these approaches policymakers should prioritise. Focusing on the UK, it finds that while job-finding rates could be improved, policies aimed at reducing the amount of job losses during a recession play an equally important role despite being less in vogue.
The labour market is in a continual state of flux. Workers are hired, fired, joining the labour force and leaving the labour force. The balance of these flows determines the unemployment rate. In the US, research suggests that job finding is most influential in driving unemployment changes (Shimer 2007), although separation from jobs also plays a role at the start of recessions (Barnichon 2009, Elsby Michaels and Solon 2009; Fujita and Ramey 2009). But the US labour market stands out as different from other countries in its high level of turnover (Elsby et al. 2008).
unemployment, job search, UK, employment protection
Where are the jobs? Out there, somewhere. Perhaps.
Alfonso Rosolia, Federico Cingano 17 July 2011
If you lose your job, can you find a new one with a little help from your friends? This column presents evidence that displaced Italian workers with more employable friends and social contacts are unemployed for a shorter period of time.
The global crisis hit jobs hard. According to the OECD, between 2007 and 2010 the number of employed people fell by almost 5 million throughout OECD countries and the number of job seekers rose by over 16 million. It is now about two years since the trough of the recession, and unemployment rates remain at historical highs in many advanced economies despite signs of recovery in economic activity and labour demand.
unemployment, jobs, networks
Egypt’s demographic pressure – Where and how to create jobs?
Marga Peeters 02 June 2011
After the drama of Egypt’s revolution comes the economic reality – one of the catalysts for regime change was the country’s high unemployment. This column shows that the growing number of young people entering the job market will only add to the pressure. It argues that job creation in the private sector should be the number one priority for stimulating Egypt’s economic growth.
Demographic developments place Egypt among the group of countries around the globe with the highest labour-supply growth for many years to come. The Egyptian economy can reap a demographic dividend from this human capital potential if the new entrants find a job (see also Noland and Pack 2008).
Development Labour markets Politics and economics
unemployment, Arab uprising, Egypt
Coping with crises: Policies to protect employment and earnings
Pierella Paci, Ana Revenga, Bob Rijkers 19 April 2011
When a crisis hits, how should policymakers move to save jobs? This column reviews the evidence from policy responses to recent crises, highlighting the importance of being prepared. It finds that countries with prudent fiscal management and sound policy infrastructure tend to suffer relatively smaller and shorter negative shocks than others.
“There cannot be a crisis next week. My schedule is already full.” – Henry A Kissinger
Crises are difficult to predict, yet their recurrence is an empirical regularity in both developing and developed countries. Nevertheless, as painfully highlighted by the ad hoc and reactive nature of the policy responses to the financial crisis of 2009 and 2010, many countries are ill-prepared to manage these recurrent shocks.
Global crisis Labour markets Macroeconomic policy
unemployment, financial crises
The roots of the German miracle
Hermann Gartner, Christian Merkl 09 March 2011
Policymakers the world over are staring at the strength of the German economy with envious eyes. This column argues that the root of Germany’s miracle lies in its “wage moderation” that was the result of labour-market policies in the years preceding the global crisis – a point that is often ignored in the public debate.
While the US labour market has seen a dramatic loss in jobs in the Great Recession, the German labour market has seemed to be unaffected – the number of employed workers has remained stable. This is all the more surprising as German GDP dropped more than in the US in 2009 (-4.7% vs. -2.7%). Some economists (e.g. Möller 2010) have correctly pointed out that German firms were hoarding labour and thereby absorbing part of the output shock.
Europe's nations and regions Labour markets
Germany, unemployment, Labour-market reform
Deviations from the Taylor rule and the dual mandate
Nicolas Groshenny 02 February 2011
Was monetary policy in the US too easy between 2002 and 2006? This column argues "no”. It shows that the large and persistent deviations from the Taylor rule over that period were indeed consistent with the pursuit of the Federal Reserve's dual mandate.
According to its official mandate, the Federal Reserve sets the federal funds rate to achieve a dual goal of price stability and maximum sustainable employment. Since the global crisis erupted, debate has been raging over the Federal Reserve's conduct of monetary policy over the period 2002-2006. For example, Taylor (2007) criticises the Federal Reserve for departing from its usual conduct of monetary policy after 2001 and suggests it kept the federal funds rate too low between 2002 and 2006 (see Figure 1).
Global crisis Monetary policy
inflation, unemployment, Taylor rules
Is short-time work a good method to keep unemployment down?
Pierre Cahuc, Stéphane Carcillo 01 February 2011
One method for combating unemployment during the global crisis has been the use of short-time work schemes that allow employers to temporarily reduce hours worked while compensating workers for the induced loss of income. In the first of two columns on labour markets, the authors present new evidence establishing that these schemes do indeed reduce unemployment. But they are no panacea and are not without their own problems.
Short-time compensation (or short-time work) aims at reducing lay-offs by allowing employers to temporarily reduce hours worked while compensating workers for the induced loss of income. At present, short-time work schemes are widespread among OECD countries, having grown in popularity during the Great Recession. As shown by Figure 1, they are now used in 25 of the 33 OECD countries.1
Figure 1. Short-time work take-up rates in the OECD countries (as a percentage of employees)
unemployment, OECD, Short-term work