Faculty Research: Dr. Coibion on Unemployment
Posted: January 18, 2014
Faculty research: Greater unemployment persistence in the United States
New research by assistant professor Olivier Coibion examines the rising persistence of U.S. unemployment in recent recessions, including the Great Recession. This persistence has increased in each of the last three recessions, meaning a longer time for employment levels to recover. Coibion and his co-authors (UC-Berkeley economists Yuriy Gorodnichenko and Dmitri Koustas) suggest that future U.S. recessions may “look more like the Eurosclerosis experience of the 1980s than traditional V-shaped recoveries of the past.” The study, which also investigates possible explanations for the increased persistence, was prepared for the Fall 2013 Brookings Panel on Economic Activity Conference.
Although the financial-shock nature of the recent recession was somewhat unique, the study rules out financial shocks as the source for increased persistence. The authors show that these shocks do not have systematically larger effects on unemployment than monetary policy shocks. The authors also find that monetary and fiscal policies themselves can only account for a small part of increased unemployment persistence. Having ruled out these explanations, the study suggests that the true explanation must come from some change in the economy’s “propagation mechanisms.” They point to several possible changes in recent recessions, including rising cyclicality in both long-term unemployment and disability claims, changes in the demand for skills, and rising income inequality.
The authors also stress that the protracted nature of recoveries from recession has important implications for appropriate government policy. According to the study, “[I]f business cycles have become systematically more protracted affairs, as seems to be the case, then discretionary fiscal policy responses should target longer-lived projects rather than transitory transfer payments. Investment projects can be especially desirable because these a) tend to have larger stimulative effects per dollar, b) tend to have long-run social returns that significantly exceed those of transfer payments, and c) do not require legislators to vote on multiple “stimulus” packages.”
The study has received a lot of national media coverage, including stories in the Washington Post, BusinessWeek, The Economist, and Slate. The complete study by Coibion and his co-authors, entitled “Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence,” can be found through this link. Coibion joined the UT-Austin faculty in Fall 2012 and spent last year as a Research Fellow at the International Monetary Fund.