What's Wrong with the Labor Market

Consider this graph of the ratio of the number of initial claims for unemployment compensation relative to the number of individuals employed by the private sector.

The black line is the average number of people during the month who filed an initial claim for unemployment compensation per 1,000 people employed in the private sector.  The red line is the number of continuing claims for unemployment compensation for each initial claim.  For a short period of time at the ends of the 1973-75, 1980 and 1981-82 recessions there were over 8 people filing an initial claim for unemployment compensation for every 1,000 people employed in the private sector. The maximum value of this series during the 2008-2009 recession was only 5.98, less than three-fourths of the maximum value during the above three recessions.  In terms of people losing their jobs, the 2008-2009 recession was not particularly bad.  In part this was because of the downward trend in the ratio of initial claims to private sector employment that, as shown by the black line, began during the Reagan administration.  Be that as it may, initial claims are much lower relative to the size of the labor force now than during the boom years of 1984-89.
      The problem in the labor market appears to be the inability of the unemployed to find jobs.  The red line shows the ratio of continuing claims to initial claims for unemployment compensation.  After this ratio jumped during the 1969-70 recession, it failed to fall once again below 6, but only exceeded 8 for a short period after the end of the 1973-75 recession and barely went above eight during the early 1990's.  From the graph it appears that there was some sort of structural change associated with policy after the 1990-91 recession that caused the equilibrium value of this ratio to increase from a number below 6, to one above 6 but less than 8.  Even during the severe recession of 1981-82, the number of continuing claims to initial claims did not exceed 8.
     But the story has been different since the 2001 recession and much worse since late 2008.  It took a long time for the ratio of continuing to initial claims to fall below 8 after the 2001 recession, but then it jumped to a value as high as 10.5 after the 2008-2009 recession and has yet to fall below 8.  Indeed, in May 2012 there were 8.75 continuing claims for every initial claim.
     What does this tell us? There must be some institutional or economic policy change responsible for the inability of the unemployed to find work.  Most people appear to have forgotten how dour economy was during the 1973-75, 1980 and 1981-82 recessions.  In addition to high unemployment policy-makers had to deal with rising inflation.  Indeed, it would not be unreasonable to presume that the 1981-82 recession was caused by an explicit monetary policy decision to reduce the rate of inflation. But the Reagan administration did not respond to this recession by increasing government regulations and arguing that it would not hurt the economy to raise taxes.  Indeed President Reagan took the opposite approach.  Are our current economic ills the result of a failure to reduce regulations rather than impose additional ones? Are they the result of threats to increase taxes rather than proposing tax cuts?  It is a position at least worth considering.