If the Problem is Weak Demand, Increasing Demand Helps
A new report from the Federal Reserve Bank of San Francisco investigates “Why is Unemployment Duration So Long?” It turns out, just as mainstream economics predicts, demand for labor is weak.
We use the ratio of the number of unemployed individuals to the total number of job vacancies at the national level to measure labor market tightness or net demand. The higher the ratio, the weaker is the demand for labor relative to available supply.
The ratio of the total number of unemployed workers to job vacancies accounts for about 11.5 weeks of the 15.7 extra weeks of duration in 2010–11, explaining virtually all the increase in duration when workforce characteristics are also taken into account.
The trend seems to be moving in a positive direction, but it’s clearly still awful. Our July low-point is roughly equal to 1982’s peak. But as if we needed it, we now have more evidence that conservative bugaboos like unemployment insurance are not holding back much job growth. Instead, we need to increase aggregate demand and get people spending money.