But now that the economy has undergone a period of deep crisis and it is difficult to assess what structural changes the crisis may lead to, the process becomes even more complex. One illustration of this is how one should assess future developments in the labour market. So far employment has not fallen as much as might be justified given the historical relationship between unemployment and GDP, and the large fall in GDP. This has come as a surprise to us and to other forecasters. But what conclusions should one draw with regard to the effects in the slightly longer term when the economy recovers? Employment and the number of hours worked are now beginning to increase. Normally, one might have expected a greater adjustment in the number of hours worked than we have seen in this economic downturn. The fact that the  6  For further information on resource utilisation, see Jonsson, M., Nilsson, C. and Palmqvist, S., 2008, “Should monetary policy stabilise resource utilisation?” Economic Commentary, www.riksbank.se or Öberg, S. “Monetary policy and the elusive resource utilisation”, speech published on 25 May 2009, www.riksbank.se. 4  BIS Review 58/2010  adjustment has not corresponded to the fall in production means that productivity has been very weak. But as we observe in our most recent Monetary Policy Update, which was published last week, we expect productivity to improve in the future, which also means that the number of hours worked and the number of employed will grow slowly.
3  The relationship estimated is: Change in unemploymentt = a + b0*(GDP growth)t + b1*(GDP growth)t-1 + b2*(GDP growth)t-2+ q*(Change in unemployment)t-1. εt . 4  IMF World Economic Outlook, April 2010. 2  BIS Review 58/2010  Studies have shown that unemployment may suffer long-lasting effects from a deep recession. This is partly because a person who has been unemployed for a long time loses part of his or her human capital and therefore becomes less attractive in the labour market, and partly because some people, after job-seeking for a long time, quite simply give up and leave the labour force. What is usually referred to as structural or “natural” unemployment may thus increase during periods of high and protracted unemployment. Labour market policy can counteract these effects to some extent, by for instance, offering further education and retraining to the unemployed. The situation today is in contrast to what we saw during the crisis in the 1990s. Then, GDP fell for three years and the fall in employment was greater than the fall in GDP. That crisis was domestically-generated and it was generally known that tough times lay ahead, as public finances were to be consolidated. This time, the crisis has come from outside and there has been scope for forceful fiscal policy and monetary policy measures. It is always difficult to make forecasts. Moreover, I believe it is more difficult than normal in the current situation.