The high unemployment in USA is attributed mostly to cyclical causes rather than structural causes. The natural rate of unemployment is defined as the level of unemployment at which the inflation rate is constant. From the early years up to the year 1969, it was believed that the increase or decrease in the rate of unemployment affected the rate of inflation at all times. Under the Philip’s Curve, an increase in the rate of unemployment resulted in the decrease of the inflation rate. On the other hand, a decrease in the rate of unemployment resulted in the increase of the inflation rate.
Unemployment rate in the USA has been very high due to recession. These high unemployment rates have been felt for a long time, and people are worried. Some people think that it is because of structural changes while others blame it on the cyclical causes. Those who believe that the high rates of unemployment are due to structural changes are afraid that the unemployment rates will not recede to the previous low levels.
The evidence from research on the labor market shows that USA has not had major structural changes that have had an impact on the shifting of unemployment rates in the last few years. There is evidence that shows that increase in the rate of unemployment has not been caused by job mismatch, demographic shifts, or industrial shifts (Lazear & Spletzer, 2012). Job mismatch was in the rise during recession, but it decreased at the same rate. The movement patterns of the unemployment rates display characteristics of unemployment rates that are influenced by cyclic causes. The magnitude of these patterns is, however, bigger in this recession compared to the previous recessions.
There is evidence that dispute that the structural changes are responsible for the high unemployment rate in USA. An example is the fact that the rate of unemployment rose from 4.4% in 2007 to 10.0% in October 2009 (Lazear et al 2012). The increase was rapid within a short period, and this is not a characteristic of structural changes. More evidence include the fact that USA had experienced a high unemployment rate of 10.8% in early 1980, but by the late 1980s had dropped to 6.0% and it further dropped to 4% in the year 2000 (Lazear et al 2012).
Unemployment is mostly caused by cyclical changes rather than structural changes, therefore the monetary and fiscal policies should be implemented so as to remedy the situation. Cyclical unemployment can be remedied using fiscal or monetary policies. The fiscal policy should involve increasing government spending and cutting down taxes so as to increase consumption and consequently, aggregate demand. The monetary policy should include cutting down the interests rates so as to encourage people to invest and spend.
References
Lazear E. P. & Spletzer J. R. (2012). The United States Labor Market: Status Quo or a New Normal. Retrieved from: http://www.nber.org/papers/w18386
