The Long-Term Unemployed in Virginia Rui Pereira

Transcription

1 The Long-Term Unemployed in Virginia Rui Pereira The College of William and Mary Department of Economics Thomas Jefferson Public Policy Department August 2012

2 Rui Pereira The College of William and Mary phone:

3 Acknowledgements I would like to thank Dr. Eric Jensen and Dr. Sarah Stafford of the Thomas Jefferson Public Policy Program for their support in the development of this report. I would also like to thank Tim Kestner of the Virginia Employment Commission for his comments and suggestions. Dr. Peter McHenry provided interesting discussions and reviews of labor economics helpful in the development of this report. James Harkrader and Carly Shira provided valuable research assistance in this project. Disclaimer The views expressed in this report do not necessarily represent the views of the College of William and Mary, the Virginia Employment Commission, or the Commonwealth of Virginia. Any errors or omissions are the sole responsibility of the author.

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5 Executive Summary On Monday, September 15, 2008, Lehman Brothers filed for bankruptcy after substantial efforts on the part of the Federal Reserve and the Department of the Treasury to save the overleveraged company. Two days later, the United States government invested billions of dollars to save the failing insurance giant AIG. Over the course of that week, the stock market plummeted, with the Dow Jones Industrial Average losing 374 points for the week, nearly 3.3 percent of its value. Less than a month later, during the week ending on October 10, the Dow Jones Industrial Average fell 1,432 points, losing close to 13.6 percent of its value. These stark figures reflect the start of the most significant recession in the post-war period, alternatively called the Great Panic and the Great Recession, triggered by subprime lending, mortgage defaults and the loss in value of securities based on these mortgages. Although the recession began in September 2008, United States Gross Domestic Product (GDP) continued to fall through the second quarter of The stock market hit bottom during the week of March 6, 2009, nearly six months after the collapse of Lehman Brothers. Over the six month period, the Dow Jones Industrial Average fell by 40.9 percent to 6,717 points. By October 2009, the unemployment rate had grown 3.9 percentage points to 10.0 percent, its highest level since the early 1980s. Over 6.6 million fewer people were employed and 5.9 million more people were unemployed and looking for work since the onset of the Great Recession. Virginia too was hit hard by the recession, with important companies such as Circuit City and Land America Financial Group filing bankruptcy and laying off thousands of workers and many other companies scaling back operations significantly. More than 44,000 Virginians lost i

6 their jobs between September 2008 and November The number of unemployed Virginians increased by more than 124,000, and the unemployment rate increased 3 percentage points. The United States economy has begun to show signs of recovery, with GDP growth of 3.0 percent in 2010 and 1.6 percent in The stock market too has returned to levels before the collapse. In spite of these improvements in the economic environment, the unemployment rate remains troublingly high at 8.2 percent in May 2012 and 9.0 percent for the year. In the wake of the substantial downturn in economic activity precipitated by the subprime mortgage crisis and credit crunch, unemployment persists as a significant problem in both the United States and in Virginia. The purpose of this research is to examine the impact of the Great Recession on labor markets. We have two overarching goals. First, we are interested in detailing the characteristics of the unemployed and the long-term unemployed in the Virginia unemployment insurance system. Second, we are interested in examining the macroeconomic factors that are driving a persistently high unemployment rate. This question is particularly acute in the current economic environment in which labor markets have shown a very tepid recovery despite moderate economic growth over the last year. The objectives of this research are to: 1. Develop an analysis of Long-Term Unemployment (LTU) in Virginia from the fourth quarter of 2007 through the most current data. 2. Use administrative data from the unemployment insurance system to analyze the extent and nature of this issue in Virginia. 3. Supplement the analysis with additional data, such as the Current Population Survey (CPS), the Current Employment Statistics (CES) survey data, and the Local Area Unemployment Statistics (LAUS), where appropriate. ii

7 4. Compare the Total Unemployment Rate (TUR) to the Insured Unemployment Rate (IUR) to better understand and quantify the cyclical vs. long-term structural change as well as to assess the employment and training challenges presented by Virginia s LTU. 5. Focus on state aggregates with regional analysis where possible and provide demographic breakdowns by age, race/ethnicity, gender, education level, and veteran status. 6. Address recent discussions about the end of Okun's law 1 and shifts in the Beveridge curve Focus on policy implications and why these historically stable relationships might have changed. 8. Emphasize the relevance of the findings for Virginia s labor market and unemployment insurance policies. These objectives drive us to respond to two fundamental questions about unemployment in the United States and in Virginia: 1) Who was most affected by the increase in unemployment during the Great Recession and the weaker labor market conditions following the recovery? 2) At the macroeconomic level, what are the factors driving the persistently high unemployment rates during the recovery? Characteristics of the Unemployed To answer our first question: Who was most affected by the increase in unemployment during the Great Recession and the weaker labor market conditions following the recovery? We delve into the characteristics of the unemployed in Virginia and in the United States. We focus first on understanding the differences in the number of people unemployed and the unemployment rate among several demographic vertices, namely, age, gender, race/ethnicity, and education level. We then detail the characteristics of the long-term unemployed in the United States along these demographic lines. This leads to our discussion of 1 The relationship between the percentage change in GDP and the change in the unemployment rate. 2 The relationship between the vacancy rate and the unemployment rate. iii

8 the characteristics of the long-term unemployed, those individuals unemployed for more than 27 weeks. Finally, we examine the demographic characteristics of the claimants in the unemployment insurance system both in terms of the total number of claimants but also in terms of the duration of unemployment insurance claims by demographic characteristic. The labor force can be split into two components, those that have jobs - the employed - and those that do not have jobs but are actively looking for work - the unemployed. While employment has been growing steadily, it has done so at a rate slower than that of the population and the labor force. The number of unemployed Virginians has more than doubled since 2007, growing from 116,000 in the first quarter of 2007 to 245,000 during the first quarter of The pace at which unemployment grew was much greater that of the population and the labor force. Labor markets in Virginia are marginally stronger than those in the United States as reflected in the fact that the unemployment rate in Virginia has been lower than that of the United States over the past five years. During this five-year period, the unemployment rate increased in both the United States and Virginia. Both experienced the largest shock during the 2008 to 2009 period, growing 4.5 percentage points in the United States between the fourth quarter of 2007 and the second quarter of 2009 and by 3.7 percentage points in Virginia during the same period. Younger workers have had a far greater rate of unemployment than older workers. In 2010, the unemployment rate among labor market participants between the ages of 16 and 19 reached 23.2 percent, which is more than twice the rate it was in Similarly, the unemployment rate among those workers aged 20 to 24 reached 12.5 percent in The iv

9 recession, however, had a substantial impact on the unemployment rate for workers 34 to 44 years of age. This impact reflects the very low unemployment rate among older workers. Labor force participation and employment among women increased during the recession in Virginia and in the United States. The gap in the unemployment rate between men and women grew considerably during the financial crisis, with lower rates among women than men. This highlights the important role played by women in the workforce over the past several years. The two rates have since converged but reflect persistently high rates of unemployment among men and growing unemployment durations among women. The racial and ethnic breakdown of the unemployment rate in Virginia mirrors historical trends with larger unemployment rates in the African American/Black community and lower rates among Hispanic/Latino and White populations. The unemployment rate among African Americans increased to 11.2 percent in 2009 and has remained at that level since, despite moderate reductions in unemployment across all other demographic cohorts. Although White individuals have the lowest unemployment rate among all racial and ethnic groups, the increase in unemployment during the Great Recession was largest among Whites, followed very closely by the increase in the unemployment rate by African Americans. The unemployment rate among individuals with a college degree has been nearly half that of the national average. During the financial crisis, however, the unemployment rate increased the most among this group, rising by 2.0 percentage points in 2009, a nearly 77.0 percent increase. In comparison, the unemployment rate among individuals with a high school degree increased by 4.1 percentage points, which corresponded to a slightly smaller increase of 71.9 percent. v

10 The increase in the unemployment rate reflected both those individuals that experienced short unemployment spells and those with fairly long unemployment spells. Indeed, a small number of individuals with very long unemployment spells may suffer a disproportionate burden of unemployment, that is to say that most of the weeks of unemployment can be attributed to those individuals who are unemployed for a fairly long time. The duration of unemployment spells grew sharply since the Great Recession. Between 2007 and 2011, the average duration of unemployment spells grew from 16.8 weeks to 39.3 weeks. The median, less sensitive to extremely long durations, also grew tremendously between 2007 and 2010, from 8.5 weeks to 21.4 weeks, and remained at that level through Older workers, while having the lowest unemployment rate, tend to have the longest unemployment durations. For every age cohort, average unemployment durations increased between 2007 and The average duration of unemployment in 2011 was lowest among individuals aged 16 to 19, at 21 weeks, and greatest among those aged 45 to 54, at 47 weeks. For each age cohort, the number of individuals unemployed for more than 27 weeks doubled in For the three oldest age groups, this increase was quite severe; the strongest increase was felt among individuals aged 25 to 34 with an increase of percent in 2009 alone. In turn, those aged between 35 and 44 experienced an increase of percent. The share of those unemployed for durations greater than 27 weeks was highest among workers 45 to 54 years of age, standing at 52.0 percent in 2011 and decreasing for younger age cohorts. The average duration of unemployment spells increased for both men and women, reaching its peak in 2011 at 40 weeks for men and 39 weeks for women. Unemployment spell durations were consistently longer for men, though only slightly greater than that for women. vi

11 The number of individuals unemployed for 27 weeks and over grew by percent for men and by percent for women in The number of men unemployed for between 15 and 26 weeks also more than doubled. While the number of individuals unemployed for more than 27 weeks fell in 2011, this drop was led by a reduction in unemployment among men. During this time, the number of women unemployed for 27 and over weeks grew by 2.2 percent. The median unemployment duration increased by the largest amount among Hispanics, by percent between 2007 and 2010, growing from 7 to 19 weeks. Generally, however, Hispanics consistently exhibited the shortest average duration of unemployment spells. The increase in unemployment durations was considerable for both Whites and African Americans as well, increasing percent and percent between 2007 and 2010, respectively. The African American community consistently suffered from the longest average duration of unemployment, peaking in With the onset of the financial crisis, the share of each racial group that was unemployed for more than 27 weeks grew to represent the largest proportion of those unemployed in each racial and ethnic category. While unemployment grew substantially between 2007 and 2009, the unemployment insurance system experienced a more modest uptick in claimants. Since the end of 2009, the number of unemployed Virginians and the number of claimants in the unemployment insurance system fell, albeit at a moderate pace and with substantial seasonal variability. The coverage rate for the unemployment insurance system also fell slightly since the end of Coverage reached its peak during the first quarter of The seasonal variability in the number of claimants is a major facet of the unemployment insurance system and reflects the strong, but temporary, demand for labor during the last quarter vii

12 of the year. One important implication of this is that the number of unemployment insurance claims of short duration tends to be greater during the first quarter of the year. The corollary of this is that average claim durations will be longer during periods of lower unemployment, such as that observed during the last quarter of the year, as those individuals with a greater propensity for short unemployment insurance claims find temporary employment. The number of regular unemployment insurance claims has been relatively uniformly spread across age groups covering individuals over the age of 25. Despite the relatively similar numbers of claimants across age cohorts, the average durations tend to vary in systematic ways with workers 55 and older generally experiencing longer unemployment spells. The gap between the different age groups has also been growing. Men made up a larger portion of the insured unemployed than of the population. This difference reflects, in part, greater labor market participation among men as well as the growing role of women in labor force suggested by the analyses above. In Virginia, the duration of unemployment spells among women has been consistently greater than that of men. Naturally, the bulk of claimants were White or African American, reflective of their share in the population. The share of White and Asian claimants was somewhat below their respective shares in the population while the proportion of African American claimants was greater than that for the population. The tepid improvement in labor markets has largely benefited White claimants, whose numbers fell by the largest amount in the period following the Great Recession. The drop in the number of African American claimants has been much more moderate. White claimants, however, accounted for a relatively larger share of the long-term unemployed. viii

13 Claimants with a high school degree, as well as those with associate's degrees, have been substantially overrepresented in the unemployment insurance system while those with advanced degrees tend to represent a smaller portion of unemployment insurance claims. Though they represent a small portion of the claimants in the unemployment insurance system, claimants with higher education levels tend to have longer unemployment insurance claim durations. The unemployment insurance system is designed to provide a safety net for households and, at the same time, provide a source of income stability that is beneficial for smoothing consumption behavior and matching jobs to workers. The latter allows for workers to spend more time searching for jobs in the face of liquidity constraints and to potentially find better jobs, allowing them to be more productive and earn higher wages which is beneficial to society. To the extent that longer claim durations reflect the search for more productive work, as opposed to structural problems in the economy, these may be beneficial to the economy in the long run. What is driving unemployment in the U.S? To answer our second question: at the macroeconomic level, what are the factors driving the persistently high unemployment rate during the recovery? We focus our analysis on two fundamentally important macroeconomic relationships that affect labor markets. The first, Okun's law, describes the relationship between the growth rate of GDP and the unemployment rate. The second, the Beveridge curve, describes the relationship between the number of job openings and the unemployment rate and provides us with the necessary tools to decompose the changes in the unemployment rate into cyclical and structural factors. This analysis allows us to determine the relative importance of cyclical factors, such as the growth of ix

14 GDP along the business cycle, and structural factors, such as interest rates set by the Federal Reserve, federal spending, and changing skills requirements among employers. The Great Recession has been more severe than any recessions in the past 50 years. In addition to substantial losses in output and employment, the number of discouraged workers increased substantially and labor force participation fell. An important feature of the recent recession has been an increase in labor productivity, the amount of output per hour of work. The 2.2 percent growth in labor productivity is indeed an important factor which provided enough flexibility for positive GDP growth in spite of high levels of unemployment. Several possible explanations exist for the increase in labor productivity during these periods of weak economic growth. First, assuming rational personnel policies, firms will lay off their least productive workers as economic conditions weaken. Policies of this nature would leave the firm with only its relatively more productive workers and thereby contribute to greater levels of output per worker hour. Second, psychological forces may be affecting the workforce. As workers see those around them losing their jobs it may force workers to work exceptionally hard to maintain their job, despite the damage inflicted to employee morale. The weak relationship between GDP and unemployment in the period following the Great Recession is consistent with asymmetry in Okun's law. Generally, the evidence strongly suggests that Okun's law, the relationship between the unemployment rate and GDP, is sensitive to the phases of the business cycle. The Okun relationship is typically weaker during periods of economic growth than during recessions. In particular, the substantial increase in unemployment during the Great Recession is consistent with a stronger relationship between unemployment and GDP than postulated by Okun (1962). Furthermore, the weaker labor markets in the period x

15 following the regression are consistent with a delay in the response of unemployment to the losses in GDP felt during the Great Recession. Thus, a particularly weak expansion following this recession is likely to produce very weak and lagged improvements in the unemployment rate. This occurs because employers tend to be risk averse and therefore are less likely to increase employment when the prospect of weak economic growth, due to sovereign debt crises in a variety of countries among other reasons, is strong. We also find evidence of longer periods of change in the relationship between unemployment and GDP growth. Indeed, the persistently tough economic times of the late 1970s and early 1980s appear to resurface in the wake of the financial crisis. These results support the conclusion that, in addition to differences across stages of the business cycle, particularly strong shocks, such as that experienced in 2008/2009, may further increase this effect and drive a weaker relationship between economic growth and unemployment that may be more persistent still, lasting several more years. Indeed, the relatively weaker, though quite substantial recession that began in 1973 resurfaced again in the late 1970s and the early 1980s and represented a decade of weak economic conditions. We further explore the potential for structural breaks in the relationship between unemployment and GDP growth. We do so by estimating the Okun relationship using data for a series of 14 year periods starting in This analysis shows strong evidence of relatively persistent shocks to Okun's coefficient. A small shock to the relationship tends to last for a long time, though it has a relatively weak effect. This analysis is consistent with our discussion above regarding a return to the relationship experienced during the 1970s. This highlights the possibility that the end of the Great Recession and the characteristic weak labor markets in its xi

16 aftermath are reflective of a new state for the relationship between the unemployment rate and GDP growth, one that could potentially persist for several years. The evidence further suggests that the relationship between GDP and unemployment is weaker in Virginia than in the United States. This is generally true at the sub-national level and may be due to the greater degree of labor mobility between states. Although this is true at the state level, the Washington D.C. metropolitan area appears to represent something of an exception to this rule exhibiting a relatively strong relationship between unemployment and GDP. The state level data further supports the presence of greater business cycle effects associated with asymmetries in Okun's law. Indeed, unemployment increased by a substantial amount in response to changes in output growth. Having gained an appreciation of the role that economic growth plays in the persistence of high unemployment rates, we turn our attention to separating the relative strength of cyclical and structural factors affecting unemployment. This is a natural extension of the Okun relationship because GDP growth is an important cyclical factor affecting unemployment. We are also interested in the contribution of monetary and fiscal policy as well as structural factors underscoring the mismatch between training of the workforce and skills required by employers. The Beveridge curve describes the relationship between the unemployment rate and the job vacancy rate. This provides us with a description of the relative efficiency of the labor market. It does so by providing a measure of how qualified the workforce is for the available jobs. This relationship between the unemployment rate and the job vacancy rate has shown a notable and substantial shift since the end of the Great Recession. This shift reflects a loss in efficiency in the job search process and provides important insight into the weaker labor market xii

17 performance in the United States and in Virginia. The greater unemployment rates sustained since August 2009 for the same number of job openings raises some concerns regarding the matching process in United States and Virginia labor markets. A particular important component of this matching process involves the skills that are needed by businesses and the skills that potential applicants possess. This aspect of the job search process suggests that training policies and incentives for education in areas of high demand are particularly important in alleviating some of the burden of unemployment and improving the efficiency of the job search process. An important extension to this research would be an analysis of the nature of the skills mismatch. This would provide for valuable information regarding the skills in highest demand by employers. A second important dimension to ensuring smoothly functioning job markets is to minimize any information gaps for both employers and potential employees. The availability of high quality job openings data can help both employers and employees to match openings with potential employees. Our analysis concludes that cyclical factors, GDP growth in particular, explains 40.3 percent of the variation in unemployment between 1964 and This effect has grown in the last decade to 57.6 percent. Historically, particularly during the 1970s, inflation and monetary policy have played a substantial role, accounting for 24.6 percent and 19.2 percent, respectively, of the variance in the unemployment rate three years after a shock. This effect has become relatively weaker in recent years, the result of faster information processing, but also the inability to reduce interest rates further. Federal expenditure has played a greater role in the last decade, particularly in the first half of the decade, explaining 11.9 percent of the variance in the xiii

18 unemployment rate compared with 0.6 percent for the last fifty years. Finally, the difference in growth rates among industries, a measure that reflects skills mismatch in the labor market has been growing fairly consistently and accounts for 9.8 percent of the variance in the unemployment rate in recent years. Conclusions The Great Recession was the most substantial and damaging downturn in economic activity in the last 50 years. The human costs of the recession in terms of unemployment and lower labor force participation are great. Despite a modest recovery, labor markets remain weak. While the state of the economy has played a large role in the weakening of labor markets, evidence exists to suggest that structural problems have emerged in the matching process in labor markets. This inefficiency in labor markets results from a mismatch in skills among those looking for work and the demand for labor by firms and businesses. Naturally, to address these issues a comprehensive survey of the demand for labor and the skill sets of employees will contribute to the development of specific policies and tools to tackle labor market imbalances. Federal expenditure policies have also played an important role in the recovery. It is important to further this line of analysis to understand the nature of the impact of federal expenditure policies and to examine the impact of different types of public spending on employment in the United States and in Virginia. Finally, although macroeconomic forces play an important role explaining weak labor markets in recent years, it is prudent to evaluate in great detail the job search process among unemployment insurance claimants. The unemployment insurance system has an important role xiv

19 to play in stimulating the microeconomic forces that may contribute to successful reintegration into labor markets. As such, it is important to evaluate the nature and extent of the benefit system and training policies developed in this framework. Though the outlook remains relatively bleak, there are certain promising developments that can contribute towards improving labor market conditions. The importance of education among the unemployed cannot be stressed enough, nor can we underplay the importance of public spending and the right set of infrastructures in creating economic conditions conducive to growth. Appropriately targeted policies can go a long way to turn things around and encourage stronger labor markets in years to come. xv

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21 Table of Contents PART I INTRODUCTION... 1 Section 1 Introduction Motivation Scope... 3 PART II CHARACTERISTICS OF THE UNEMPLOYED AND THE LONG-TERM UNEMPLOYED... 8 Section 2 Characteristics of the Unemployed Introduction Labor Force Labor Force Participation and the Unemployment Rate Demographic Characteristics of the Unemployed in Virginia Conclusion Section 3 The Long-Term Unemployed in the United States Introduction Demographic Characteristics of the Long-Term Unemployed in the United States Conclusion Section 4 Characteristics of the Insured and Long-Term Insured Unemployed in Virginia Introduction... 44

22 4.2. The Insured Unemployed Characteristics of Claimants in the Virginia Unemployment Insurance System The Long-Term Unemployed in the Virginia Unemployment Insurance System Conclusion PART III MACROECONOMIC FACTORS AFFECTING UNEMPLOYMENT Section 5 Okun's Law Introduction How does the Great Recession compare to other recent recessions? Okun's Law: The Empirical Evidence Stability of Okun's Law Tests for Structural Breaks Conclusion Section 6 Okun's Law in Virginia Okun's Law in Virginia Preliminary Data Analysis Empirical Results Individual MSA Level Estimates Conclusions Section 7 The Beveridge Curve Overview

23 7.2. The Beveridge Curve Sectoral Structure Conclusion Appendix Section 8 Decomposing the Cyclical and Structural Factors Affecting Unemployment Structural vs. Cyclical Shocks: A VAR Approach Variance Decomposition Conclusions PART IV CONCLUSIONS Section 9 Policy and Labor Market Implications Introduction The Characteristics of the Unemployed and the Long-term Unemployed Conclusions

24 List of Tables Table 2-1 Quarterly Virginia Population by Employment Disposition, Table 2-2 Quarterly United States Population by Employment Disposition, Table 2-3 Quarterly Participation Rate and Unemployment Rate in Virginia and in the United States, Table 2-4 Virginia Unemployment Rate (Percent) by Demographic Characteristics Table 2-5 United States Unemployment Rate (Percent) by Demographic Characteristics Table 3-1 United States Unemployment by Duration, Table 3-2 United States Unemployment by Duration and by Age, Table 3-3 The Proportion of Unemployed by Duration of Unemployment in the United States by Age, Table 3-4 United States Unemployment by Duration and by Gender, Table 3-5 United States Unemployment by Duration and by Race/Ethnicity, Table 4-1 Mean and Median Duration of Unemployment Spells in the Regular Unemployment Insurance System in Virginia by Age, Quarterly Averages of Monthly Values, 2009: : Table 4-2 Mean and Median Duration of Unemployment Spells in the Regular Unemployment Insurance System in Virginia by Race/Ethnicity, Quarterly Averages of Monthly Values, 2009: : Table 4-3 Mean and Median Duration of Unemployment Spells in the Regular Unemployment Insurance System in Virginia by Level of Education, Quarterly Averages of Monthly Values, 2009: :

25 Table 4-4 Claimants in the Unemployment Insurance System in Virginia by Duration of Claim, Quarterly 2010: : Table 4-5 Claimants in the Unemployment Insurance System in Virginia by Duration of Claim by Age, Quarterly 2010: : Table 4-6 Share of Claimants in the Unemployment Insurance System in Virginia by Duration of Claim by Age, Quarterly 2010: : Table 4-7 Claimants in the Unemployment Insurance System in Virginia by Duration of Claim by Gender, Quarterly 2010: : Table 4-8 Share of Claimants in the Unemployment Insurance System in Virginia by Duration of Claim by Gender, Quarterly 2010: : Table 4-9 Claimants in the Unemployment Insurance System in Virginia by Duration of Claim by Race/Ethnicity, Quarterly 2010: : Table 4-10 Share of Claimants in the Unemployment Insurance System in Virginia by Duration of Claim, Quarterly 2010: : Table 4-11 Claimants in the Unemployment Insurance System in Virginia by Duration of Claim by Education, Quarterly 2010: : Table 4-12 Share of Claimants in the Unemployment Insurance System in Virginia by Duration of Claim by Level of Education, Quarterly 2010: : Table 4-13 Claimants in the Unemployment Insurance System in Virginia by Duration of Claim by Military Personnel, Quarterly 2010: : Table 4-14 Claimants in the Unemployment Insurance System in Virginia with Disabilities by Duration of Claim, Quarterly 2010: : Table 5-1 Comparison of Labor Market Indicators with Recent Recessions

26 Table 5-2 Okun's Law Estimates using Selected Filters and Model Specifications Table 5-3 Model Specification and Lag Length Specification Table 5-4 Asymmetry in Okun's Law Across Business Cycles Table 5-5 Markov Switching Model for Asymmetry in Okun's Law Across Model Specifications Table 5-6 Probabilities of being in State 1 - Low impact state Table 5-7 Okun's Law Coefficient Across Periods and P-value for Break in the Coefficient Table 6-1 Unemployment Rate by MSA Table 6-2 Real GDP Growth Rate by MSA Table 6-3 Panel Unit Root Tests for Unemployment and GDP Table 6-4 Okun's Law Estimates for Virginia Table 6-5 Okun's Law Estimates by Metropolitan Statistical Area Table 6-6 Sensitivity of Okun's Law Estimates in Virginia Table 7-1 Growth Rate of Employment by Sector of Economic Activity in Virginia and the United States, Table 8-1 Unit Root Tests: Null of Unit Root Table 8-2 AIC and BIC for Specification of Deterministic Components Table 8-3 Variance Decomposition by Decade

27 List of Figures Figure 2-1 Participation Rate in Virginia and the United States, 2007:Q1-2012:Q Figure 2-2 Unemployment Rate in Virginia and the United States, 2007:Q1-2012:Q Figure 2-3 Unemployment Rate in the United States by Gender, 2007:Q1-2012:Q Figure 2-4 Unemployment Rate in the United States by Level of Education, 2007:Q1-2012:Q Figure 4-1 Insured Unemployed and Total Unemployed in Virginia, October 2009-April Figure 4-2 The Insured Unemployed as a Percent of Total Unemployment in Virginia, Monthly October 2009-April Figure 4-3 The Insured Unemployed in the Regular Unemployment Insurance System in Virginia by Age, Monthly October 2009-April Figure 4-4 The Insured Unemployed in the Regular Unemployment Insurance System in Virginia by Gender, Monthly October 2009-April Figure 4-5 Mean Unemployment Duration in the Regular Unemployment Insurance System by Gender, December 2009-April Figure 4-6 The Insured Unemployed in the Regular Unemployment Insurance System in Virginia by Race/Ethnicity, Monthly October 2009-April Figure 4-7 Share of the Insured Unemployed in the Regular Unemployment Insurance System in Virginia by Race/Ethnicity Figure 4-8 The Insured Unemployed in the Regular Unemployment Insurance System in Virginia by Education Level, Monthly October 2009-April

28 Figure 4-9 The Insured Unemployed in the Regular Unemployment Insurance System in Virginia by Veterans, Monthly October 2009-April Figure 4-10 Mean Unemployment Duration in the Regular Unemployment Insurance System by Military Personnel, December 2009-April Figure 4-11 The Insured Unemployed in the Regular Unemployment Insurance System in Virginia by Disability, Monthly October 2009-April Figure 4-12 Mean Unemployment Duration in the Regular Unemployment Insurance System by Claimants with Disabilities, December 2009 to April Figure 4-13 Claimants by Duration in Regular Unemployment Insurance System in Virginia, Monthly October 2009-April Figure 4-14 Claimants by Duration in Regular Unemployment Insurance System in Virginia by Gender, Monthly October 2009-April Figure 4-15 Claimants with Unemployment Insurance Claims of 27 Weeks and Over in Regular Unemployment Insurance System in Virginia by Gender, Monthly October 2009-April Figure 4-16 Claimants by Duration in Regular Unemployment Insurance System in Virginia by Race/Ethnicity, Monthly October 2009-April Figure 4-17 Claimants with Unemployment Insurance Claims of 27 Weeks and Over in Regular Unemployment Insurance System in Virginia by Race, Monthly October 2009-April Figure 4-18 Share of Unemployment Insurance Claims by Race/Ethnicity and by Duration Figure 4-19 Share of the Insured Unemployed by Duration of Unemployment Insurance Claim and Level of Education Figure 4-20 Claimants by Duration in Regular Unemployment Insurance System in Virginia by Military Personnel, Monthly October 2009-April

29 Figure 4-21 Claimants by Duration in Regular Unemployment Insurance System in Virginia with Disabilities, Monthly October 2009-April Figure 5-1 Quarterly United States Unemployment Rate, 1948:1-2012: Figure 5-2 Time Series Plot of the Real Growth Rate of GDP and the Change in the Unemployment Rate in the United States, 1948:1-2012: Figure 5-3 Scatter Plot of the Real Growth Rate of GDP and the Change in the Unemployment Rate in the United States, 1948:1-2012: Figure 5-4 Rolling Static OLS Okun's Law Coefficient Estimates Figure 5-5 P-value for Break in Okun's Coefficient by Date Figure 7-1 Beveridge Curve in the United States 12/ / Figure 7-2 Beveridge Curve in Virginia Figure 7-3 Job Vacancy and Unemployment Data in the United States, December 2000 to June 2012 (Thousands) Figure 7-4 Job Vacancy and Unemployment Data in Virginia, May 2007 to April Figure 8-1 Time Series Plot for Macroeconomic Series

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31 PART I INTRODUCTION

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33 Section 1 Introduction

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35 Section 1 Introduction 1.1. Motivation On Monday, September 15, 2008, Lehman Brothers filed for bankruptcy after substantial efforts on the part of the Federal Reserve and the Department of the Treasury to save the overleveraged company. Two days later, the United States government invested billions of dollars to save the failing insurance giant AIG. Over the course of the week, the stock market plummeted, with the Dow Jones Industrial Average losing 374 points for the week, nearly 3.3 percent of its value. Less than a month later, during the week ending on October 10, the Dow Jones Industrial average fell 1,432 points, losing nearly 13.6 percent of its value. These stark figures reflect the start of the most significant recession in the post-war period, alternatively called the Great Panic and the Great Recession, triggered by subprime 2

36 lending and aggravated by the resulting credit constraints in the economy. Although the crisis began in September 2008, United States Gross Domestic Product (GDP) continued to fall through the second quarter of The stock market hit bottom during the week of March 6, 2009, nearly six months after the collapse of Lehman Brothers. Over the six month period, the Dow Jones Industrial Average fell by 40.9 percent to 6,717 points. Between September 2008 and October 2009, the unemployment rate grew 3.9 percentage points to 10.0 percent, its highest level since the early 1980s. Over 6.6 million fewer people were employed and 5.9 million more people were unemployed and looking for work since the onset of the Great Recession. Virginia was hit hard by the recession, with important companies such as Circuit City and Land America Financial Group filing bankruptcy and laying off thousands of workers and many other companies scaling back operations significantly. More than 44,000 Virginians lost their jobs between September 2008 and November The number of unemployed increased by more than 124,000, and the unemployment rate increased 3.0 percentage points. The United States economy has begun to show signs of recovery, with a GDP growth rate of 3.0 percent in 2010 and 1.6 percent in The stock market also returned to levels measured prior to the collapse. In spite of these improvements in the economic environment, the unemployment rate remains troublingly high at 8.2 percent in May 2012 and 9.0 percent for the year Scope The purpose of this research is to examine the impact of the Great Recession on labor markets. Our focus is both on the individuals who have been affected by the recession and on the structural and cyclical factors that have driven changes in the unemployment rate. 3

37 The objectives of this research are to: 1. Develop an analysis of Long-Term Unemployment (LTU) in Virginia from the fourth quarter of 2007 through the most current data. 2. Use administrative data from the unemployment insurance system to analyze the extent and nature of this issue in Virginia. 3. Supplement the analysis with additional data, such as the Current Population Survey (CPS), the Current Employment Statistics (CES) survey data, and the Local Area Unemployment Statistics (LAUS), where appropriate. 4. Compare the Total Unemployment Rate (TUR) to the Insured Unemployment Rate (IUR) to better understand and quantify the cyclical vs. long-term structural change as well as to assess the employment and training challenges presented by Virginia s LTU. 5. Focus on state aggregates with regional analysis where possible and provide demographic breakdowns by age, race/ethnicity, gender, education level, and veteran status. 6. Address recent discussions about the end of Okun's law 3 and shifts in the Beveridge curve Focus on policy implications and why these historically stable relationships concepts might have changed. 8. Emphasize the relevance of the findings for Virginia s labor market and unemployment insurance policies. These objectives drive us to respond to two fundamental questions about unemployment in the United States and in Virginia: 1) Who was most affected by the increase in unemployment during the Great Recession and the weaker labor market conditions following the recovery? 2) At the macroeconomic level, what are the factors driving the persistently high unemployment rates during the recovery? The first part of our labor market analysis focuses on detailing the characteristics of the unemployed and, in particular, the long-term unemployed in Virginia and the United States. In Section 2, Section 3 and Section 4, we examine the demographic characteristics of the 3 The relationship between the percentage change in GDP and the change in the unemployment rate. 4 The relationship between the vacancy rate and the unemployment rate. 4

38 unemployed with a particular focus on gender, race/ethnicity, education, veteran status and disability. This approach allows us to understand who has been most affected by the economic downturn. We also evaluate the extent to which claimants in the unemployment insurance system reflect the general characteristics of the unemployed. The next major objective of this report is to understand and quantify the importance cyclical and structural factors in driving changes in the unemployment rate through time. This macroeconomic analysis is based firmly on analyses of the stability of Okun's law and of shifts in the Beveridge curve. These analyses allow us to examine cyclical factors, that is, those factors that reflect business cycle variations as well as structural factors affecting unemployment. Section 5 and Section 6 examine the stability of Okun's law. Okun s law describes the relationship between the GDP growth rate and changes in the unemployment rate. More generally, however, Okun's law is predominately formulated in macroeconomic analyses with respect to the relationship between deviations in unemployment from its natural rate and the output gap; that is, the difference between the level of GDP and its trend, allowing for a separation of cyclical and trend components in GDP. This approach allows us to identify cyclical factors that affect the unemployment rate. Section 7 provides an analysis of the Beveridge curve. The Beveridge curve describes the relationship between the unemployment rate and the job vacancy rate. This relationship, and potential changes in the relationship, reflect the efficiency of the job search process in Virginia and United States labor markets. Section 8 presents a decomposition of the cyclical and structural factors that affect unemployment. The interplay between cyclical and structural factors affecting unemployment is 5

39 appropriately examined in the context of a vector autoregression relating inflation, unemployment, GDP, the federal funds rate, federal expenditure, and a measure of sectoral dispersion developed by Lilien (1982). The VAR analysis allows us to quantify the contribution of cyclical and structural factors through a decomposition of the forecast error variance for unemployment. This analysis allows us to estimate the relative importance of GDP, monetary policy, fiscal policy and the rate of change in the sectoral composition of the economy to unemployment in terms of their percent contribution to changes in unemployment. Section 10 concludes and discusses some of the policy implications of this research. 6

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41 PART II CHARACTERISTICS OF THE UNEMPLOYED AND THE LONG-TERM UNEMPLOYED

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43 Section 2 Characteristics of the Unemployed

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45 Section 2 Characteristics of the Unemployed 2.1. Introduction Our goal is to identify the demographic and socio-economic groups that were most affected by the recent increase in the unemployment rate. These identifications provide an important benchmark for understanding the human impacts of the Great Recession while providing a framework for evaluating the extent to which demographic factors may contribute to trends in unemployment. As such, the goal of this section is to explore these social and demographic characteristics of the unemployed in the United States and in Virginia. 12

46 2.2. Labor Force The starting point for our analysis of labor markets is an understanding of the size of the labor force and the population. Table 2-1 presents the population of Virginia by employment disposition between 2007 and 2012 and Table 2-2 presents the quarterly United States population by employment disposition for the same time period. The civilian non-institutional population aged 16 and over in Virginia grew steadily between 2007 and 2012, from 5.8 million in the first quarter of 2007 to 6.3 million in the first quarter of This increase of nearly 7.6 percent reflects various factors including migration and population aging. During the same period, the civilian labor force grew at a slightly faster pace, increasing 8.6 percent. Knowledge of the composition of the labor force is important to understanding unemployment dynamics, particularly during the Great Recession. The labor force can be split into two components, those that have jobs the employed, and those that do not have jobs but are actively looking for work the unemployed. While employment grew steadily, it did so at a rate slower than the rate of growth of the population and the labor force. Between 2008 and 2012, employment grew 5.5 percent; however, it fell by nearly 1.0 percent between the first quarter of 2008 and the third quarter of 2009 reflecting, the loss of 39,000 jobs in Virginia. More troubling still is the rapid increase in the number of unemployed in Virginia. The number of unemployed Virginians more than doubled since 2007, growing from 116,000 in the first quarter of 2007 to 245,000 during the first quarter of In addition, between the third quarter of 2008 and the first quarter of 2009, the unemployment rate grew at an average quarterly rate of nearly 20.5 percent. The pace at which unemployment grew clearly exceeded that of the population and the labor force by a substantial margin. 13

47 Table 2-1 Quarterly Virginia Population by Employment Disposition, (Thousands) Civilian non-institutional population (aged 16 and over) Civilian labor force Employed Unemployed Not in labor force 2007q1 5,838 3,998 3, , q2 5,854 4,006 3, , q3 5,872 4,030 3, , q4 5,890 4,061 3, , q1 5,906 4,086 3, , q2 5,922 4,107 3, , q3 5,942 4,128 3, , q4 5,961 4,162 3, , q1 5,978 4,201 3, , q2 5,996 4,214 3, , q3 6,017 4,204 3, , q4 6,037 4,218 3, , q1 6,084 4,248 3, , q2 6,160 4,254 3, , q3 6,181 4,259 3, , q4 6,200 4,274 3, , q1 6,217 4,286 4, , q2 6,234 4,295 4, , q3 6,252 4,321 4, , q4 6,267 4,343 4, , q1 6,280 4,341 4, ,939 Source: Bureau of Labor Statistics, Current Population Survey 14

48 Table 2-2 Quarterly United States Population by Employment Disposition, (Thousands) Civilian non-institutional population Civilian labor force Employed Unemployed Not in labor force 2007q1 230, , ,135 6,925 77, q2 231, , ,851 6,865 78, q3 232, , ,944 7,129 79, q4 232, , ,272 7,374 79, q1 232, , ,221 7,662 78, q2 233, , ,932 8,201 79, q3 234, , ,262 9,300 79, q4 234, , ,066 10,642 80, q1 234, , ,534 12,766 80, q2 235, , ,317 14,343 80, q3 236, , ,375 14,840 81, q4 236, , ,325 15,257 83, q1 236, , ,667 15,040 83, q2 237, , ,261 14,871 83, q3 238, , ,273 14,640 84, q4 238, , ,077 14,711 84, q1 238, , ,549 13,766 85, q2 239, , ,607 13,903 85, q3 239, , ,770 13,908 86, q4 240, , ,567 13,393 86, q1 242, , ,912 12,746 87,779 Source: Bureau of Labor Statistics, Current Population Survey 15