Stalking the Cause of Unemployment

Is the U.S. jobs crisis structural or cyclical? To the man or woman who’s lost a job, the pain is the same no matter the cause. To economists, though, finding the right answer to that question could help the Federal Reserve and even legislators shape policy.

Fed researchers have been scouring data and examining models to determine why the jobless rate has remained stuck around 9 percent or more since April 2009. If the rate is stuck because the economy is in a deep cyclical downturn, Fed Chairman Ben Bernanke and his colleagues should be able to bring down unemployment by keeping interest rates near zero, eventually stimulating demand and encouraging businesses to start hiring again, says Sung Won Sohn, former chief economist at Wells Fargo and now an economics professor at California State University-Channel Islands. In this scenario, the Fed’s loose monetary policy will get the U.S. back to what’s called the natural rate of unemployment—the rate that an economy can sustain without triggering inflation.