Research Review | 2.17.2011 | U.S. Labor Market

What Is the New Normal Unemployment Rate?
Justin Weidner and John Williams | San Francisco Fed | Feb 14, 2011
Mounting evidence suggests that structural factors may have increased the “normal” rate of unemployment to about 6.7%. Much of this increase is likely to be temporary. In particular, the extension of unemployment benefits probably accounts for about half of the increase. But, even with a 6.7% natural rate, current and forecasted levels of unemployment imply that significant labor market slack will persist for several years. It is important to stress that each of the methods used to estimate the natural rate is subject to considerable error, especially given the limited experience of very high unemployment in the post-World War II U.S. economy. As the recovery proceeds, we should develop a clearer picture of the new normal rate of unemployment.
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A Quantitative Analysis of Unemployment Benefit Extensions
Makoto Nakajima | Philadelphia Fed | Feb 8, 2011
Facing the most severe recession since the Great Depression, the U.S. government enacted a series of extensions of UI benefits that provide an unemployed worker with the maximum of 99 weeks of UI benefits, compared with the regular duration of 26 weeks. While these extensions are one of the responses to the unemployment rate that reached 10 percent in late 2009, which was the second time this happened since 1982-83 in the postwar U.S. history, it is also possible that the extensions themselves contributed to the rising unemployment rate by encouraging jobless workers to remain unemployed so that they received the UI benefits for an extended duration and by discouraging the unemployed to search for a job intensively. Although there are existing attempts to measure the effect of UI benefit extensions on the unemployment rate, this paper is the only one that uses a structural model to answer the question….
I find that the extensions of UI benefits contributed to an increase in the unemployment rate by 1.2 percentage points, with a baseline conservative calibration. Since unemployment went up by 5.1 percentage points, from 4.8 percent before the current downturn started at the end of 2007 to 9.9 percent in the fall of 2009, the contribution of the series of UI bene t extensions is about a quarter (24 percent). Among the remaining 3.9 percentage points, 2.4 percentage points are due to the large increase in the separation rate, while the staggering job- nding probability contributes 1.4 percentage points. I also find that the last extension moderately slows down the recovery of the unemployment rate. Specifically, the model indicates that the last extension keeps the unemployment rate higher by up to 0.4 percentage point during 2011.
Economic Freedom and Employment Growth in U.S. States
Thomas A. Garrett and Russell M. Rhine | St. Louis Fed | Jan/Feb 2011
The authors extend earlier models of economic growth and development by exploring the effect of economic freedom on U.S. state employment growth. They find that states with greater economic freedom—defined as the protection of private property and private markets operating with minimal government interference—experienced greater rates of employment growth. In addition, they find that less-restrictive state and national government labor market policies have the greatest impact on employment growth in U.S. states. Beyond labor market policies, state employment growth is influenced by state and local government policies, but not the policies of all levels of government, including the national government. Their results suggest that policymakers concerned with employment should seriously consider the degree to which their own labor market policies and those of the national government may be limiting economic growth and development in their respective states.
The Great Recession’s Long Tail
Rebecca Thiess | Economic Policy Institute | Feb 2, 2011
Overall unemployment numbers also mask enormous variation in joblessness among different racial and ethnic groups. Though the overall unemployment rate was 9.6% in 2010, it proved to be much higher for some groups than for others, as seen in Figure E. The unemployment rate among blacks, for instance, was nearly 16%, and among Hispanics it was around 13%. With overall unemployment projected to be 8.7% in 2012, we can expect unemployment among blacks to remain over 15% and among Hispanics to be around 11%.

Extended mass layoffs, fourth quarter 2010
US Bureau of Labor Statistics | Feb 15, 2011
Employers initiated 1,910 mass layoff events in the fourth quarter of 2010 that resulted in the separation of 295,571 workers from their jobs for at least 31 days.

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