long term unemployment: causes, costs curesmchinn/loungani.pdfincrease in ltu during the great...
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Presentation for the Conference on Long‐Term Unemployment in Industrial Countries,University of Wisconsin Madison April 28 2011University of Wisconsin‐Madison, April 28, 2011
LONG‐TERM UNEMPLOYMENT:CAUSES COSTS CURESCAUSES, COSTS, CURES
PRAKASH LOUNGANI, INTERNATIONAL MONETARY FUND | APRIL 28, 2010
VIEWS EXPRESSED ARE THOSE OF THE PRESENTER AND SHOULD NOT BE ASCRIBED TO THE IMF.
I thank Larry Ball and Daniel Leigh for many useful discussions; Joao Jalles for excellent inputs on the topic; and Jair Rodriguez for outstanding research assistanceon the topic; and Jair Rodriguez for outstanding research assistance.
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OutlineOutline
Facts
CuresC Costs CuresCauses Costs
Forecast
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Snapshot of Long‐Term l ( )Unemployment (LTU)
8.0
5 0
6.0
7.0Long-term Unemployment Rate, 2010Q3
3.0
4.0
5.0
0 0
1.0
2.0
0.0
Facts
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Increase in LTU d hduring the Great Recession
7.0
4.0
5.0
6.0 Long-term Unemployment Rate Change 2010-07
1 0
2.0
3.0
-1.0
0.0
1.0
-2.0
Facts
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U.S.: the Epicenter of the lUnemployment Crisis
Number of Unemployed People 2010 (Millions)
Japan, 3.3
Number of Unemployed People, 2010 (Millions)
Spain, 4.7 France, 2.8
Other Advanced Countries, 6.7
Italy, 2.1
United States, 14.8 Total: 39.8
Facts
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The Distribution of MiseryThe Distribution of Misery
Unemployed for 27 Weeks and Over, 2009 (Millions of people)
Germany, 2.0
Japan, 1.5
France, 1.4
p y , ( p p )
Spain, 2.1
Italy, 1.2
Other Advanced Countries 2 1
p ,
United Kingdom, 1.1
United States, 4.5Countries, 2.1
Total: 15.8
Facts
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“It’s Aggregate Demand, Stupid”It s Aggregate Demand, Stupid
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Demand Drop is the Major CauseDemand Drop is the Major Cause7
SpainIreland
5
6
7-10
Cha
nge
United States
Portugal 2
3
4
ploy
men
t, 20
07
Greece United KingdomItaly
DenmarkBelgiumFrance
SwedenFinland
Netherlands0
1
2
g-Te
rm U
nem
p
AustriaNetherlands
Germany-2
-1
12 10 8 6 4 2 0 2
Long
Causes
-12 -10 -8 -6 -4 -2 0 2GDP % Change, 2007-10
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Stresses in the construction sector
10
-10
0Construction Employment Change, 2008 to 2010Q2
-30
-20
-40
30
-50
xxx
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Credit and UnemploymentCredit and Unemployment7
IrelandSpain
5
6
Cha
nge
United States3
4
men
t, 20
07-1
0
Greece
Portugal
United Kingdom
2
3
rm U
nem
ploy
m
Belgium
FinlandFrance
ItalyDenmark
Sweden
0
1
-10 -5 0 5 10 15 20
Long
-Ter
Causes
-10 -5 0 5 10 15 20Real Credit to Private Sector, 2007-10 Change
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Structural factors also at workStructural factors also at work0.20
Dispersion Index (12 months moving average)
0.16
0.18
Dispersion Index (12 months moving average)
0.10
0.12
0.14
0.06
0.08
0.02
0.04
Causes
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Response on LTU to structural shockResponse on LTU to structural shock0.30
Long Term Unemployment Response to Dispersion Shock
0.20
0.25
Long-Term Unemployment Response to Dispersion Shock
0.15
0.05
0.10
-0.05
0.00
Causes
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
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Bottom‐line: cyclical vs. structuralBottom line: cyclical vs. structural Cyclical Structural
0.8
1.0
0.6
0.4
0.0
0.2
Causes
Unemp. Rate Up to 5 weeks 5 to 14 weeks 15 to 26 weeks 26+ weeks
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Job loss lowers earningsJob loss lowers earnings
Costs
Earnings Losses of Men in stable jobs at and around job separation (t=0) in 1000 USD, from von Wachter et al. (2009)
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Job loss raises odds of mortality
• Effects on health (Sullivan, von Wachter 2009): Persistent impacts on health: increase of risk of heart-attack, reduced life expectancy. Graph shows marginal effect of displacement on odds of mortality
Costs
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Dwindling hopes of finding a jobDwindling hopes of finding a job
Costs
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Policy Responses b l d– a bit more complicated
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What to avoidWhat to avoid
Monetary and Fiscal Policy
An inadequate response …response …
Cyclical Unemployment
Structural Unemployment
… turns one
Cures
into the other
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What to doWhat to do
Monetary and Fiscal Policy
Structural Policies
Fi l d
A robust
Fiscal and credit policies can help
response
Cyclical Unemployment
Structural Unemployment
Cures
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• Supportive of recovery;• Ready to act if recovery
•Medium‐term consolidation, but not too Ready to act if recovery
faltershasty or too harsh
Fiscal PolicyFiscal Policy Monetary Monetary PolicyPolicy
Financial Sector Financial Sector PoliciesPolicies
Active Labor Active Labor Market PoliciesMarket Policies
•• Financial repair and reform so credit is flowing again
•Maintain UI benefits (how long?)•Short‐term work: maintain or phase out?•Dual employment system: notDual employment system: not working•Hiring subsidies: yes, but how to design?
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Forecasts of unemployment, b d tiby duration
2 1
2.2
2.3 US: unemployment (<5 weeks, percent)
Actual2.4
2.6
2.8 US: unemployment (5 -14 weeks, percent)
Actual
1.8
1.9
2.0
2.1
Predicted
1.6
1.8
2.0
2.2Predicted
1.5
1.6
1.7
1.0
1.2
1.4
1.5
2.0
2.5US: unemployment (15-26 weeks,
percent)
Actual
Predicted
2 5
3.0
3.5
4.0
4.5 US: Long-term unemployment (>26 weeks, percent)
Actual
Predicted
0.5
1.0
0.5
1.0
1.5
2.0
2.5
Forecast
0.0 0.0
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Forecasts of U.S. unemployment rateForecasts of U.S. unemployment rate
11 US: unemployment
9
10
7
8 Actual
Predicted
WEO
6
7Consensus forecast
4
5
Forecast