The chart shows the percentage of the unemployed that have been in this situation for over 27 weeks since 1981, covering the last four cycles.
In addition to cyclical/structural factors, which I´ll not discuss because I believe they are not a determining factor in explaining the patterns observed, I would think two factors are important in explaining the data:
(a) The strength (depth) of the recession, and
(b) The behavior of nominal spending (Aggregate Demand) during the recovery
Thus, while in the 1981 cycle the recession was deep, aggregate demand bounced back robustly (see chart below). This allowed employment to rebound relatively quickly, avoiding the fall into a long term unemployment trap.
In the 1990 cycle, the recession was much less strong/deep than in 1981, nevertheless long term unemployment was much more persistent (falling much more slowly) and that, I believe, was due to the fact that the rebound in aggregate demand was much more contained.
The outcome in the 2001 cycle, which despite being the mildest of all post war recessions in terms of real output behavior, is significantly worsened. Although long term unemployment peaks at a level comparable to the two previous cycles, it ‘lingers’ somewhat at the peak and then falls only slowly and a little (I believe structural/demographic factors may be of some import here) before flattening out at a high level up to the time it connects to the 2007 cycle.
As I show in the chart below, the rebound in aggregate demand in the recovery was very slow, so that employment remained ‘depressed’ for much longer, allowing long term unemployment to persist. And quite a few posit that during that time rates “were too low for too long”!
By looking at long term unemployment in present cycle I almost believe that our policymakers were ‘experimenting’ with the idea of ‘maximizing’ long term unemployment in the previous cycles and have now been awarded a PhD on the subject!
The chart shows the close correspondence between the strength of aggregate demand (NGDP) and the speed with which employment recovers (which maps very well with the behavior of long term unemployment shown above. (I indicate the adoption of “forward guidance” in August 2003 and how this accelerated nominal spending and induced a recovery in employment, despite the possible negative impact of structural/demographic factors sustaining long term unemployment).
To be fair, many argue that in the present cycle fiscal policy was found ‘wanting’. The next chart compares the employment chart from before only this time with a measure of ‘fiscal stimulus’: the rise in federal government purchases during the relevant periods. As can be easily observed, there´s no connection, unlike what happens with the behavior of spending, which is closely controlled by the Fed.