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Cyclical Unemployment Becomes Structural Unemployment:
Unemployment Persistence in the Great Depression and Today
Gabriel Mathy
American University
Cyclical unemployment becomes structural unemployment if it is allowed
to persist. In the aftermath of the Great Recession, employment has
remained depressed and unemployment has remained high. At the same
time, the matching process between workers and jobs has worsened even
as GDP growth has resumed. The depth of the most recent recession
and the slow subsequent recovery makes recent experience
fundamentally different than the preceding postwar experience of the
American business cycle. However, the Great Depression of the 1930s
saw both a severe recession as well as a recovery which took almost a
decade. I examine labor market mismatch between job openings and the
unemployed by applying a Mortensen­Pissarides search­and­matching
model to the Great Depression. My findings are that that mismatch
worsened in downturn of the Great Depression but that matching between
the unemployed and jobs improved as output rose, especially during the
wartime boom of the 1940s which decisively eliminated the structural
unemployment problem. The only hypothesis consistent with this evidence
is that the long­term unemployed have difficulty reentering labor markets
which generates outward shifts in the Beveridge curve, but that a sustained
robust recovery can return the long­term unemployed to employment.
Additional evidence is brought to bear by showing that mismatch has not
risen among the short­term unemployed and that any increase in structural
unemployment results from an increase in mismatch among the long­term
unemployed. This divergence is present in both the current recovery as
well as in the recovery from the Great Depression and cannot be
explained by standard theories of structural unemployment such as skills
mismatch, geographic mismatch, or structural unemployment resulting
from technical change as these theories would predict increase mismatch
among both the short­term and long­term unemployed. A similar massive
increase in hiring as took place in the 30s and 40s is required to eliminate
our current employment problem as our cyclical unemployment is
becoming structural as more workers leave the labor market. In terms of
policy responses, monetary and fiscal stimulus should be expanded and
direct government hiring should be expanded as a sustained increase in
job openings is the best policy to return the long­term unemployed to
employment and to prevent cyclical unemployment from permanently
reducing employment and output.