Believe those who are seeking the truth. Doubt those who find it. Andre Gide


Tuesday, February 15, 2011

Cyclical asymmetry in the unemployment rate

Economists have known for a long time that there is a cyclical asymmetry in the unemployment rate. In a recession, the unemployment rate tends to spike up quickly and sharply. During an economic expansion, the unemployment rate tends to decline only gradually. Consider the following data, for example:


The shaded regions roughly depict the periods over which the unemployment fell from peak to trough. As you can see, what the U.S. is experiencing right now looks a lot like what Canada experienced in the early 1990s. Evidently, it takes time to rebuild the employment stock after a shock. And the bigger the shock, the longer it seems to take. Is this a puzzle? Not if you believe we've experienced a Humpty Dumpty moment; but it is if you believe in Deflated Balloons; see here.

Yah...see that protracted decline in the Canadian unemployment rate from 1992 to 2008? That was because of deficient demand. Demand was clearly deficient for almost 20 years. Shoulda increased G more, I guess.

6 comments:

  1. I'd like to see you compare employment. I'm guessing the action is in NILF.

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  2. Dave: I did that here:

    http://andolfatto.blogspot.com/2010/12/great-canadian-slump-can-it-happen-in.html

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  3. What is the theoretical explanation for this asymmetry?

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  4. Anon: I think it follows from any labor market search model with endogenous job destruction. The basic idea is that it is easier to kick down a sand castle, than build it back up again. See, if you're interested,

    David Andolfatto, 1997. "Evidence and Theory on the Cyclical Asymmetry in Unemployment Rate Fluctuations," Canadian Journal of Economics, Canadian Economics Association, vol. 30(3), pages 709-21, August.

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  5. It is also predicted by the Austrian theory of the business cycle!

    (Sorry, David, had to throw that in there!)

    Also, any thoughts on Arnold Kling's theory of Patterns of Sustainable Specialization and Trade (PSST)? That seems to be getting more action these days.

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