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economy lab


The news that the unemployment rates fell from 7.7 per cent in March to 7.6 per cent in April is welcome, but still disappointing. The recovery in employment began in August 2009, but 21 months of steadily increasing employment has reduced the unemployment rate by only one percentage point. In contrast, the unemployment rate jumped from 6.1 per cent to 8.7 per cent in the 10 months following the financial crisis of 2008. If unemployment can rise so fast, why can't it fall equally fast?

The answer lies in the dynamics of the labour market. The mechanics of the rise of unemployment during recessions are very different from those of the reduction of unemployment during expansions.

Perhaps the best way to think about unemployment is to liken it to a giant bathtub. Flowing into the tub are workers who have left either quit or were let go from their previous jobs. These numbers are considerable; on the order of 225,000 people per month. In addition, there is the net change in the labour force: an additional 16,000 or so per month.

Flowing out of the tub are those who find new jobs: roughly 250,000 each month. In normal times, this outflow is larger than the inflow of people into unemployment, so the number of those who are unemployed falls. But the rate at which unemployment falls is very modest: typically less than 10,000 per month. Unemployment does fall during expansions, but very slowly.

So what happens in recessions? Contrary to what you might expect, the increase in unemployment is not due to an increase in layoffs: the number of people leaving or losing their jobs stays relatively constant - although the composition of quits and layoffs changes. The real problem is the sharp drop in the number of people hired. Given the scale of labour market churn, even a small reduction in the hiring rate can generate a significant backlog: the number of unemployed people increased by almost 475,000 in the 10 months following October 2008.

Unemployment reached its peak in August 2009, and it has fallen by 150,000 since then: an average of about 8,000 per month. At this rate, it will take another three and a half years to whittle unemployment down to what it was before the recession hit.