How Did the Great Recession Affect Structural Unemployment?

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The collapse of the housing bubble in 2007 and 2008 caused a deep recession, which sent the unemployment rate to 10.0% in October 2009—more than double its pre-crisis rate. As of September 2017, the unemployment rate has fallen to below its pre-crisis lows, indicating that the spike in unemployment was cyclical, in other words, that it was a response to the business cycle that reversed itself as the overall economy recovered.

There is an argument to be made, however, that the Great Recession caused an increase in structural unemployment.

Key Takeaways

  • Structural unemployment is long-lasting unemployment that comes about due to fundamental shifts in an economy.
  • The Great Recession that followed the 2008 financial crisis is often cited as creating structural employment by permanently destroying certain jobs in some sectors of the economy.
  • Economists are still arguing over whether the Great Recession increased structural unemployment in the U.S. economy in any lasting way.

What Is Structural Unemployment?

Unlike cyclical unemployment, structural unemployment is not directly correlated to the business cycle but is a chronic response to broad economic shifts. If someone loses their job as a real estate agent because of a downturn in the housing market, then finds another job as the market picks up, they have experienced cyclical unemployment. If someone loses their job as an elevator operator because elevators have become automated, they are experiencing structural unemployment. (Both forms contrast to frictional unemployment, the unavoidable result of imperfect information in a healthy labor market.)

According to one line of thinking, the Great Recession caused such profound disruption in some areas of the country that local economies contracted permanently and local industries fizzled out or moved elsewhere. Structural unemployment increased as a result: people, particularly the low-skilled, were unable to find jobs without moving or entering a new industry, which often proved too difficult due to economic, educational, or other barriers. The housing crisis – the immediate cause of the Great Recession—made matters worse by tying people to houses they could not sell without losing money.

Measuring Structural Unemployment

Structural unemployment is difficult to measure, but there are hints in the data that the spike in unemployment following the crisis was not purely cyclical. While the headline unemployment rate (the one mentioned above, also known as U-3) has fully recovered, other measures have not. U-1, which measures the share of the labor force that has been unemployed for 15 weeks or longer, remains above its pre-crisis low; this measure of chronic unemployment may provide a window into the level of structural unemployment. Similarly, U-6, which includes those who have given up looking for a job or have reluctantly settled for part-time work, remains above its pre-crisis low. 

Structural Unemployment and the Great Recession

A 2011 IMF working paper attempted to measure the Great Recession’s effect on structural unemployment in the U.S and concluded that it had risen by around 1.75 percentage points from a pre-crisis level of 5%. The paper also suggested that, as a result of the rise in structural unemployment, inflationary pressures would result from a fall in (U-3) unemployment to levels below around 7%. In the late 2010s, inflation remains subdued with unemployment rates below 5% and did not increase significantly until the 2020 economic crisis and lockdown, which caused unemployment to suddenly spike to levels not seen since the Great Depression.

While it is possible that structural unemployment is higher today than it was before the housing bubble burst, it is difficult to parse the causes of the increase. In the decade since the financial crisis began, automation has accelerated, pushing people out of manufacturing jobs. Competition from foreign producers, particularly in China, has increased. Rents in big cities and the costs of higher education have increased rapidly, making it more difficult to enter the markets and industries where labor is in high demand. Some of these phenomena are themselves related to the crisis, arising in part from it or contributing to the direction it took. 

The Bottom Line

Did the Great Recession raise structural unemployment? There probably is no simple answer, but it is clear that the years following the 2008 financial crisis were marred by high unemployment and a re-orientation of understanding and evaluating certain risks related to credit, real estate, and derivatives. These, in turn, may have modified the structure of the economy in such a way as to alter the job market and create lasting job losses in certain industry sectors.

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