Seven Lean Years

• Author: Prakash Loungani
• Position: an Advisor in the IMF’s Research Department and heads the IMF’s Jobs and Growth project.

The onset of the Great Recession in 2007 led to job losses around the world not seen since the Great Depression of the 1930s. By 2010, 30 million more people had joined the ranks of the unemployed. About three-quarters of this increase took place in high-income economies.

Emerging markets and low-income countries, which in the past have borne the brunt of global recessions, were more resilient this time. In emerging markets the unemployment rate barely budged—an increase of only 0.25 percentage point by 2010—and in low-income economies it actually declined.

Since 2010, the global economy has mounted a slow and uneven recovery. The global unemployment rate has now returned to its 2007 pre–Great Recession level of about 5 1/2 percent. In the high-income group—member countries of the Organisation for Economic Co-operation and Development (OECD)—it shot up to 8 1/2 percent in 2010 and has slowly inched back to 7 1/2 percent (see Chart 1, left panel). Although employment grew at a fast pace in the United States over the past year, it remained relatively flat in the euro area, the region largely responsible for the anemic recovery in global employment (see Chart 1, right panel).

“Strucs vs. cycs”

Over the course of 2009–11, there were “two gangs of economists warring over the causes of high unemployment,” as an article in Slate noted at the time.

One camp, the “cycs,” argued that cyclical factors were the predominant, if not the only, cause. Their ringleader, U.S. Nobel Prize winner Paul Krugman, wrote: “Why is unemployment remaining high? Because growth is weak—period, full stop, end of story.” To this camp, the reason for weak growth was insufficient demand, which the government should try to stimulate through easy monetary policy and fiscal stimulus.

The “strucs,” on the other hand, argued that unemployment was high not just because growth was weak but because of a host of structural problems in the labor market, reflected in more unfilled jobs even as unemployment was increasing. This mismatch was noted in a speech by Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis:

“Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs. There are many possible sources of mismatch—geography, skills, demography . . . It is hard to see how the Fed can do much to solve this problem . . . the Fed does not have the means to transform construction workers into manufacturing workers.”

Who won the fight?

Four years later, which camp turned out to be right...