How Did the Great Recession Affect Structural Unemployment?

The collapse of the housing bubble in 2007 and 2008 caused a deep recession, which sent the unemployment rate to 10.0% in Oct. 2009—more than double its pre-crisis rate. As of Sept. 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 remained subdued with unemployment rates below 5%. In fact, unemployment did not increase significantly until March 2020 due to the COVID-19 pandemic and resulting economic crisis and lockdown. 2020 unemployment spiked 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. 

Structural Unemployment and COVID-19

Just as economists were beginning to understand the long-lasting impacts of the Great Recession, the global economy was shaken by the COVID-19 pandemic. Unemployment rates skyrocketed, businesses closed their doors, and a number of stimulus bills were passed in the first few months of the pandemic.

While it is clear economists will be studying the impact of COVID on the economy and job market for years to come, the pandemic's acceleration of both the push towards remote work and the falling revenue of in-person retail may produce yet another facet of structural unemployment whose impact has not yet been fully realized.

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.

Those interested in learning more about the Great Recession, unemployment, and other financial topics may want to consider enrolling in one of the best investing courses currently available.

Article Sources
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  1. U.S. Bureau of Labor Statistics. "The Recession of 2007-2009," Page 2.

  2. Federal Reserve Bank of St. Louis. "Unemployment Rate (UNRATE)."

  3. Federal Reserve Bank of St. Louis. "Percent of Civilian Labor Force Unemployed 15 Weeks and Over (U-1)."

  4. Federal Reserve Bank of St. Louis. "Total Unemployed, Plus All Persons Marginally Attached to the Labor Force, Plus Total Employed Part Time for Economic Reasons, as a Percent of the Civilian Labor Force Plus All Persons Marginally Attached to the Labor Force (U-6) (U6RATE)."

  5. International Monetary Fund Working Papers. "Has the Great Recession Raised U.S. Structural Unemployment," Pages 4 and 32.

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