The Truth Behind Today’s Long-term Unemployment Crisis and Solutions to Address It

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By Heidi Shierholz June 26, 2014

Earlier this week, EPI economist Heidi Shierholz spoke on a Congressional Full Employment Caucus panel about policy fixes to the nation’s long-term unemployment crisis, convened by Rep. Conyers (D-Mich.). Other panelists included Betsey Stevenson, Member of the White House Council of Economic Advisers, and Judy Conti, Federal Advocacy Coordinator at the National Employment Law Project. Below are her comments, which explain why we remain in a long-term unemployment crisis, why the long-term unemployed will continue to face tough job odds without substantial policy intervention, and what can be done to address it.

The Great Recession officially ended five years ago this month, but the labor market has made only agonizingly slow progress towards full employment. We’ve had an unemployment rate of 6.3 percent or more for more than five and a half years; as a reminder, the highest the unemployment rate ever got in the early 2000s downturn was 6.3 percent, for one month. And even this headline unemployment rate probably overstates the true degree of labor market weakness, as it has fallen in large part in recent years because people have left the labor force in large numbers—and not just voluntary retirees. If the job market improves in coming years, it is very likely that many of these “missing workers” will return. Because of the ongoing weakness in the labor market, long-term unemployment remains extremely elevated. Though the labor market is headed in the right direction, unemployed workers still vastly outnumber job openings in every major industry, and the prospects for job seekers remain dim.

The labor force is comprised of employed people and jobless people who are actively seeking work. Before the Great Recession started, just 0.7 percent of the labor force was unemployed long-term. That shot up to 4.4 percent by the spring of 2010, and has since dropped part-way back to 2.2 percent. This may not sound high on the face of it, but it is still three times higher than what it was before the recession began and represents 3.4 million long-term unemployed workers. Furthermore, outside of the Great Recession and its aftermath, it is higher than at any other time in more than 30 years, including the entirety of the two recessions prior to the Great Recession. Importantly, it is also far higher than any period in the past when Congress has decided to end extended unemployment benefits. In short, we remain in a long-term unemployment crisis, even if you wouldn’t know it judging from too many policymakers’ actions.

It is important to note that there’s no real puzzle as to why long-term unemployment is high: economic growth remains extraordinarily weak. And this weakness is driven simply by an ongoing shortfall of aggregate demand (spending by households, businesses, and governments) relative to potential output.

The long-term unemployed are not fundamentally different than other unemployed workers, and there is no evidence that the mere fact of being unemployed long-term fundamentally damages workers’ productivity. Moreover, there is no evidence that long-term unemployment cannot be solved through macroeconomic policy to boost the aggregate demand shortfall. In fact, today’s high long-term unemployment rate is exactly what you’d expect given the overall weak labor market, how long it has been so weak, and pre-recession trends in long-term unemployment. In other words, what is going on now with long-term unemployment is right in line with the historical relationship between long-term unemployment and the overall unemployment rate. Today’s long-term unemployment crisis is part and parcel of the weak labor market more broadly and there is no evidence that the long-term unemployed have somehow hardened into structurally unemployed workers with the wrong or depreciated skills.

One way to see this is to note that today’s long-term unemployment crisis is not confined to workers who don’t have the right education or happen to be looking for work in specific occupations or industries where jobs aren’t available. Long-term unemployment is elevated in every age, gender, and racial and ethnic group, and it’s elevated in every major occupation, in every major industry, and at all levels of educational attainment. Some groups definitely have lower long-term unemployment rates than others, but that is always true, in good times and bad. The key point is that for all groups, the long-term unemployment rate is substantially higher now than it was before the recession started.

Elevated long-term unemployment for all groups, like we see today, and the fact that long-term unemployment has improved right in line with other measures of labor market improvement means that today’s long-term unemployment crisis is not due to something wrong with these particular workers. It is overwhelmingly due to more than six years of weak business hiring across the board. And this weak hiring is simply due to the aggregate demand shortfall. Employers are not stupid and do not make hiring decisions on a whim. Instead, they hire when they see demand for their goods and services pick up enough to force them to hire. Until policymakers act to boost that demand, hiring will be slower and long-term unemployment will be higher than it should be.

I am now going to talk about what we should do about this. My role here is to identify what economic analysis tells us should be done, not what is necessarily politically feasible. Given that demand is the problem, we should be:

  • Passing extended benefits again to help the long-term unemployed, who are the ones who have been the hardest hit by the lasting effects of the Great Recession,
  • Undertaking other measures that also stimulate aggregate demand, and
  • Enacting policies that spread total hours worked across more workers.

Taking these in turn:

  • Extended UI benefits would do the obvious thing of providing a lifeline to those workers and their families who have suffered the blow of job loss when the labor market is historically weak. Some have argued that extended benefits could actually make the labor market weaker by giving laid-off workers an incentive not to return to work. The empirical evidence strongly rejects this concern. The most rigorous papers on this show that there is almost no delay in returning to work—for example a paper by Henry Farber of Princeton and Rob Valletta of the San Francisco Fed show that UI extensions in the Great Recession increased the time it took UI recipients to take another job by three percent. Further, a slight increase in search-time is actually a benefit of UI—the point is to give liquidity-constrained unemployed workers a little space to find a job-match that will provide durable benefits to both them and potential employers. For example, it may not be optimal for either workers or employers for people with young kids to be forced to take the first job available even if it comes with a two hour commute, as they will likely quit when as soon as a more convenient job becomes available.

Besides not hindering job-search, UI extensions also stimulate the macroeconomy and this stimulus generates jobs. A wealth of macroeconomic studies confirm that spending on UI extensions is one of the most effective mechanisms available for injecting money into the economy, since the long-term unemployed are, almost by definition, cash strapped and very likely to immediately spend their UI benefits. This spending creates demand for goods and services, and who provides goods and services? Workers. Thus, it generates jobs. We estimate that if we allow UI extensions to lapse for all of 2014, it will cost the U.S. economy about 300,000 jobs by the end of the year.

  • Aside from UI extensions, policymakers should also focus on other policies that will generate demand for U.S. goods and services. In the current moment, these are policies such as fiscal relief to states, substantial additional investment in infrastructure, including repairing old and crumbling schools, and providing aid to cities like Detroit to tear down blighted buildings and invest in public transportation, new schools, and establishing direct job creation programs in communities particularly hard-hit by unemployment. This could also include continued monetary support from the Federal Reserve and efforts to end the practice of trading partners engaging in currency management that hurts the competitiveness of U.S. companies and allows aggregate demand to leak away from the U.S. economy.
  • Policies that would spread the total hours of work across more workers could also bring down unemployment from the supply side. In particular, work sharing would encourage employers who experience a drop in demand to cut back average hours per employee instead of cutting back the number of workers on staff. Some countries, for example Germany, have used work sharing very successfully. Instead of workers being laid off and receiving unemployment benefits, the German government can help companies keep employees, working fewer hours, on their payrolls by subsidizing their wages with the money saved on unemployment benefits.

Some claim that we’ve missed the boat on work sharing because layoffs are now back down to pre-recession levels, and that the problem in our labor market right now is not too many layoffs, rather it’s lack of hiring. That’s actually true, but while layoffs are no more prevalent now than before the recession began, the consequences to getting laid off are much more severe than they are during normal times because we have such weak hiring. And there are in fact a lot of layoffs every month—even now our labor market has a lot of churn. There are currently around 1.5 million layoffs every month, meaning a work-sharing program that prevented even a small fraction of those could still significantly reduce unemployment.

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