During the past few years, economists have been debating how much of the increase in unemployment since the start of the 2007-2009 recession is due to reduced demand for goods and services compared with compositional changes entailing worker reallocation across industries and areas. In other words, how much of the increase in the official unemployment rate from 5.0% at the recession's outset in December 2007 to a peak of 10.0% in October 2009 was cyclical unemployment and how much was structural unemployment? Distinguishing cyclical from structural unemployment is more than an academic exercise. Their relative contribution to the increase in the unemployment rate since 2007 has different implications for the pace at which the economy can grow without spurring inflation and for which public policies are most appropriate to lower an unemployment rate that remains elevated long after the latest recession's end in June 2009. Many workers who became unemployed during the 2007-2009 recession are expected to return to jobs in their former industries as demand for the goods and services they previously produced grows during the recovery phase of the business cycle. Fiscal and monetary policies often have been used to jump-start aggregate demand and job growth for the cyclically unemployed. In response to the latest recession, for example, recent Congresses enacted multiple measures to stimulate demand and promote job creation while the Federal Reserve (Fed) undertook various strategies to mitigate the financial crisis that coincided with the recession and to stimulate economic activity. If the increase in unemployment is largely due to the sluggish pace of output growth since the recession's end, then economic theory suggests that fiscal and monetary stimulus would be suitable strategies for lowering the unemployment rate from its still-elevated average of 8.1% in 2012. Those workers who permanently lost their jobs during the 2007-2009 recession are expected to experience a longer spell of unemployment than those temporarily laid off until product demand revives in their former sectors of employment. The duration of job losers' unemployment may be further lengthened if the skills they possess do not match the skills required by jobs in growing sectors or if they live in areas different from those experiencing job growth. To overcome skill mismatch for example, displaced workers may require retraining or additional formal education. Congress recognized that different public policies are appropriate for helping structurally unemployed workers return to economically productive activities when it included training provisions among the countercyclical measures in the American Recovery and Reinvestment Act, for example. Rather than persisting in their search for jobs, some structurally unemployed workers may drop out of the labor force, thereby reducing the supply of labor and the capacity of the economy to grow in the long run. A smaller labor force also reduces income tax payments and imposes additional costs on society. For example, because older workers, the partially disabled and less educated are among those most likely to stop participating in the labor force, early claiming of Society Security retirement benefits and entering the Social Security Disability Income program could increase. Given the different implications of cyclical and structural unemployment for policymakers, this report distinguishes between the relative magnitude of the two in recent years. Before conducting this analysis, the report defines a few concepts that will help the reader navigate the remainder of the report. Economists often break down unemployment into three types: frictional, structural, and cyclical. Frictional unemployment arises from the ever-present movement of people into and out of jobs. Examples include the unemployment of college graduates while searching for their first jobs, of family caregivers returning to the labor force, and of workers who quit jobs before having found new ones. Both frictional and structural unemployment involve the worker-to-job matching process. Two distinctions between them are the voluntary nature of some frictional unemployment and its shorter duration compared with structural unemployment. Structural unemployment arises from obstacles to the worker-to-job-matching process that lengthen unemployment spells. Impediments to unemployed workers quickly moving to firms with available jobs include mismatches (between the skills or locations of jobless workers and the skill requirements or locations of available jobs), the composition of the unemployed (toward workers who permanently lost jobs vis-à-vis workers temporarily laid off, for example), and the characteristics of labor market institutions (such as the wage-replacement rate and duration of unemployment benefits). Cyclical unemployment arises when the economy experiences a decrease in the demand for goods and services. Employers adjust to a downturn in the business cycle by temporarily laying off workers and cutting the hours of employees retained to fill reduced product demand. When demand starts to revive, firms may be reluctant to immediately resume hiring and may first increase the hours of their existing work force. Once firms feel confident that economic growth will continue, they recall the experienced workers laid off during the recession. Under certain conditions, however, cyclical unemployment may evolve into structural unemployment. If the economy grows slowly for an extended period after a recession's end and causes the unemployment rate to remain high for quite some time, then some of what began as cyclical unemployment may become structural unemployment. The following is an example of how this occurs. By definition, the skills of the cyclically unemployed at the outset of their displacement match the skills demanded by employers. But the longer these workers remain jobless, the greater the likelihood their skills will become rusty. As economic growth strengthens and firms start hiring workers, the skills of the long-term unemployed may have so deteriorated that they no longer match the skill requirements of available jobs. Frictional, structural, and cyclical unemployment are not directly measured, but policy analysts have estimated the nonaccelerating inflation rate of unemployment (NAIRU). Because the NAIRU is estimated without regard to fluctuations in aggregate demand (i.e., without regard to the business cycle), it commonly is used as a proxy for the structural unemployment rate. The NAIRU or natural rate of unemployment reflects the extent of long-term slack in the labor market, which is helpful to know when formulating policy. For example, a substantial increase in structural unemployment implies that there is much less excess labor (capacity) in the economy. Consequently, the Fed cannot reduce the official unemployment rate as much as it previously could without raising the inflation rate. Based on the following analysis of changes in multiple labor market indicators by industry and area, a majority of the increase in unemployment between the 2007-2009 recession's onset and its peak in 2010 appears to be cyclical. As discussed in detail below, this finding is supported by several empirical studies which estimated that any increase in structural unemployment that occurred accounted for a minority of the rise in the U.S. unemployment rate. The results do not suggest that the nation is facing a "new normal" of elevated unemployment rates for years to come. The mismatch argument for sustained increases in the unemployment rate and the NAIRU is predicated on imbalances in labor supply and demand across sectors and skill groups. The extent of such imbalances can be assessed by examining employment growth and unemployment rates across industry sectors, states, and occupations. This approach is pursued below using annual average data from 2007 to 2010, the year in which the unemployment rate peaked at 9.6%. The 7.8 million jobs lost between 2007 and 2010 occurred across a broad swath of industries. The number of jobs on employers' payrolls plummeted in 18 of the 24 industries shown in Figure 1 . Cyclically sensitive industries, such as manufacturing and construction, bore the brunt of job losses during the latest recession just as they did during prior recessions. When aggregate employment stopped declining in March 2010, "the dispersion of employment gains and losses across sectors returned to its pre-recession level, suggesting very little imbalance in the pace of employment growth at that point." The data displayed in Figure 1 support DeLong's statement that "What we have witnessed is not a shift in demand into sectors lacking an adequate number of qualified and productive workers, but rather a collapse in the level of aggregate demand." He concluded that, as of fall 2010, evidence was lacking of "labor shortages, rising wages, and increasing prices in expanding sectors, accompanied by high unemployment elsewhere in the economy," which would be the case if skills mismatch was the major explanation for the nation's high unemployment rate. DeLong went on to note, however, that were unemployment to remain high "for two or three more years" then structural unemployment could well become a bigger factor because "nothing converts cyclical unemployment into structural unemployment more certainly than prolonged unemployment." Just as job losses occurred in most industries between 2007 and 2010, so too did the unemployment rate rise in every state in the nation. The across-the-board increase in unemployment rates suggests that labor demand fell throughout the country, belying the notion of a mismatch between the locations of available jobs and workers desiring employment. Only two states—Alaska (6,500 jobs) and North Dakota (17,200 jobs)—and the District of Columbia (17,100 jobs) posted net employment gains between 2007 and 2010. This implies that unemployed workers had little incentive to move to find jobs, which does not support speculation that conditions in the housing market dampened the migration rate of unemployed homeowners. Most empirical analyses also suggest that the state of the housing market is not an especially good explanation for the decrease in geographic mobility since 2007. Molloy, Smith, and Wozniak found neither the housing market contraction nor the 2007-2009 recession to be persuasive reasons for the recent decrease in internal migration rates. Kaplan and Schulhofer-Wohl determined that the large drop in annual interstate migration rates starting in 2006, which had led some observers to infer a connection to "house lock," was instead the result of a change in the Census Bureau's procedure for imputing missing data in the Current Population Survey (CPS). Kaplan and Schulhofer-Wohl considered the smaller change in migration rates from two other sources (the Census Bureau's American Community Survey and the Internal Revenue Service) to bolster their assessment that interstate migration has not recently decreased to a substantial degree.