Amerisclerosis?: The Puzzle of Rising U.S. Unemployment Persistence

The persistence of U.S. unemployment has risen with each of the last three recessions, raising the specter that future U.S. recessions might look more like the “Eurosclerosis” experience of the 1980s than like the traditional V-shaped recoveries of the past. We revisit several explanations for this rising persistence, decomposing them into three possible sources: business cycle fluctuations, changing policy responses, and propagation mechanisms. First, we find that financial shocks do not systematically lead to more persistent unemployment than monetary policy shocks, casting doubt on the hypothesis that different drivers of business cycles are the primary explanation. Second, we find that changing monetary and fiscal policy responses account for approximately one-third of the rise in unemployment persistence. Third, after examining three propagation mechanisms we find that jointly they cannot account for any rising persistence of unemployment. The three propagation mechanisms we focus on—declining labor mobility, changing age structures, and the decline in trust among Americans—are consistent with four other cyclical patterns that have evolved since the early 1980s: a rising cyclicality in long-term unemployment, lower regional convergence after downturns, rising cyclicality in disability claims, and missing disinflation. We exploit regional variation in labor market outcomes across Western Europe and North America during 1970–91 to assess the predictive capacity of each propagation mechanism for unemployment persistence. In summary, two-thirds of the rise in unemployment persistence is unexplained.