Current Unemployment, Historically Contemplated

Eleven years ago, our Brookings Paper "Why Has the Natural Rate of Unemployment Increased over Time?" analyzed long-term changes in joblessness among American men.¹ We documented the dramatic rise between 1967 and 1989 in both unemployment and nonparticipation in the labor force among prime-aged males. Our main conclusion was that a steep and sustained decline in the demand for low-skilled workers had reduced the returns to work for this group, leading to high rates of unemployment, labor force withdrawal, and long spells of joblessness for less-skilled men. We found that time spent out of the labor force and time spent unemployed accounted in roughly equal measure for the long-term growth in joblessness. We concluded that structural factors, primarily the decline in the demand for low-skilled labor, had dramatically changed the prospects for a return to low rates of joblessness any time soon.

After that paper was published, things appeared to change. The 1990s opened with a brief recession that was followed by the longest sustained decline in unemployment in modern U.S. history. By the end of that expansion, the unemployment rate had reached its lowest level since the late 1960s, falling below 4 percent for the first time since 1969. Some macroeconomists argued that the so-called natural rate of unemployment had permanently shifted to 5 percent or below.² Because we had emphasized changes in the structure of labor demand that had made a return to low rates of joblessness unlikely, these facts presented a challenge to our 1991 framework. Maybe we were just wrong-maybe the demand and supply framework of our previous work is inconsistent with rates of joblessness in the post-1990 period. If so, we would join a distinguished group of social scientists who have drawn attention to a significant empirical phenomenon only to watch that phenomenon disappear immediately thereafter.³ As it turns out, however, the framework that we developed for thinking about pre-1990 patterns of joblessness also does fairly well in helping to understand jobless time in the post-1990 period.

In this paper we look in some detail at employment data from the 1990s, revisiting issues raised in our earlier work. Specifically, we ask:

-Have the trends we identified in our earlier paper-the concentration of nonemployment among the less skilled, the growth of nonparticipation in the labor force, and the increased duration of joblessness-been reversed with the fall in aggregate unemployment?

-Did the expansion of the 1990s really return the U.S. labor market to conditions of the late 1960s, as unemployment statistics seem to indicate?

-Does the economic framework of supply and demand we utilized a decade ago still help in understanding long-term developments in unemployment, nonemployment, and labor force participation?

Our answers are surprising. First, the basic trends toward longer spells of joblessness and rising nonemployment have continued in spite of the prolonged expansion of national output and the concomitant fall in unemployment rates. Long jobless spells and labor force withdrawal were more important in the 1990s than ever before. Second, the fall in unemployment to levels close to historical lows is very misleading. Broader measures of joblessness show that the labor market of the late 1990s was more like the relatively slack labor market of the late 1980s than like the booming labor market of the late 1960s. Finally, the basic forces of supply and demand identified in our previous paper continue to have explanatory power. The theory does a reasonably good job of explaining those trends that have continued, as well as those that have changed.

Recent data also provide considerable insight into what has happened in the labor market over the past decade. Over the 1990s, even as unemployment was falling, time spent out of the labor force was rising. In fact, the increase in time spent out of the labor force was so large that total joblessness-which combines the unemployed with those who have withdrawn from the labor force-was as high at the business-cycle peak in 2000 as it had been at...