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Federal Reserve Bank of San Francisco
Working Paper Series
New evidence on cyclical and structural sources of unemployment
Zinzhu Chen
Prakash Kannan
Prakash Loungani
Bharat Trehan
Abstract

We provide cross-country evidence on the relative importance of cyclical and structural factors in explaining unemployment, including the sharp rise in U.S. long-term unemployment during the Great Recession of 2007-09. About 75% of the forecast error variance of unemployment is accounted for by cyclical factors—real GDP changes (“Okun’s Law”), monetary and fiscal policies, and the uncertainty effects emphasized by Bloom (2009). Structural factors, which we measure using the dispersion of industry-level stock returns, account for the remaining 25 percent. For U.S. long-term unemployment the split between cyclical and structural factors is closer to 60-40, including during the Great Recession.


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Zinzhu Chen & Prakash Kannan & Prakash Loungani & Bharat Trehan, New evidence on cyclical and structural sources of unemployment, Federal Reserve Bank of San Francisco, Working Paper Series 2011-17, 2011.
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Keywords: Unemployment
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