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[2014-1] Analysis of Factors Causing Changes in US Unemployment Rate since the Financial Crisis

Research Department 2014.02.25 3025

  Although the US economy has recently entered a recovery phase after its severe recession since the global financial crisis, the pace of recovery in terms of employment is modest. The US Federal Reserve and others assess the slow recovery in employment conditions as being attributable mainly to cyclical factors, noting the persisting negative GDP gap. However, some raise the opinion that non-cyclical factors, such as the intensified labor supply and demand skill mismatch, the entrenched long-term unemployment, the prolongation of the period of unemployment benefits, and the growing uncertainties about economic policy are also acting to hold back the
improvement in employment conditions.

  Taking this into account, this paper decomposes the changes in the US unemployment rate into cyclical factors and non-cyclical factors by estimating the natural rate of unemployment using an unobserved component model, based on the unemployment rate, the representative index of employment conditions.

  According to the results of empirical analysis, the natural rate of unemployment in the US has risen in the wake of the global financial crisis, but its pace of increase is estimated to be not large. This implies that a considerable part of the rise in unemployment since the crisis has been caused by cyclical factors. Consequently, if the momentum of economic recovery becomes sufficiently robust going forward, the improvement in employment conditions is also expected to accelerate in the process. This, in addition, coincides with the view that employment conditions can improve only if the US Federal Reserve strengthens the growth momentum by maintaining Quantitative Easing for a considerable time, since the deterioration in employment conditions seen since the financial crisis is attributable mainly to cyclical factors.


  However, the fact that various employment indicators come in below their pre-crisis period levels is interpreted as meaning that several non-cyclical factors are holding back overall improvement in the labor market in a situation
in which the momentum of economic recovery is not sufficient. Furthermore, given the orthodox study results that the uncertainties in economic policy, which have mounted greatly since the financial crisis, exercise an influence on corporations’patterns of employment, thus holding back employment conditions, the continuation of micro policy efforts to improve the structure of the labor market and the easing of policy uncertainties are important tasks in conducting economic policy going forward.