Permanence and Congestion

This approach to job search also gives us a further reason why unemployment is highly permanent.

Think of what happens when business turns down. Businesses find that they are selling less goods and services, so they need not produce as much as they had been producing. What do they do?

In Dr. Arthur Okun's words, they "hang out the no-help wanted sign" -- that is, they stop hiring. That means there are fewer opportunities for those already in the unemployment pool, and the productivity of their search drops. That cuts the flow from the unemployed pool into the employed pool. For that reason alone, unemployment would start to grow, ceteris paribus.
If that doesn't cut their labor costs fast enough, they lay people off. Those who are laid off permanently, and some who are laid off temporarily, begin searching for other jobs. This increases the flow of disemployment, and so contributes both to further growth of unemployment and to more congestion of job search markets, and thus to further decreasing productivity of job search.

The point is that some of the results of increasing unemployment, the congestion of job search and reduction of the productivity of job search, actually tend to push unemployment further from its long-term average, rather than back toward it. This would make unemployment even more permanent than it would otherwise be.

Discouraged Workers