Solving America's Long-term Unemployment Conundrum

An economist with the Brookings Institute, Dr. Gary Burtless, recently published an article entitled "Long-Term Unemployment: Anatomy of the Scourge", a look at the rise in American joblessness lasting for more than six months.  Before we get into Dr. Burtless' article, let's look at the Federal Reserve Bank of St. Louis data showing the rise in the number of civilians unemployed for 27 weeks or longer since the late 1940s:

In June 2012, 5.37 million Americans had been unemployed for 27 weeks and longer, down from a peak of 6.73 million in April 2010 but still very highly elevated when compared to previous post-recessional levels.

Dr. Burtless opens by noting that, in the 11 recessions since the end of World War II, unemployment reached the 9 percent level in only three (1974 - 1975, 1981 - 1982 and the Great Recession.  What is really different this time is the rate of long-term unemployment; for the first time, the long-term unemployment rate exceeded 3 percent.  As if that weren't bad enough, it peaked at 4.5 percent in April 2010, two percentage points higher than its previous record and by April 2012, the long-term unemployment rate had exceeded 3 percent of the total labor force for 34 successive months!

While these numbers appear grim, the situation for long-term unemployment in Europe has historically been even worse.  In 2007, more than 20 percent of France's unemployed and nearly 40 percent of Germany's unemployed had been out of work for two years or longer.  In the same year, less than 10 percent of Americans had been unemployed for longer than one year.

American job-seekers have historically had a welcoming job market.  Between 1990 and 2007, most Americans that were classified as unemployed in a given month had found a job by the following month.  By 2007, the monthly job-finding rate had dropped to 28 percent, falling even further to 16 percent by the nadir of the Great Recession.  Since the end of the Great Recession, while the monthly job finding rate had improved, by the end of 2011, only 17 percent of unemployed workers found work within a month.

The length of time it takes to find a job is directly related to the number of job openings.  Here is a look at the Federal Reserve Bank of St. Louis data showing the drop in the number of job openings during the Great Recession and the very slow post-recessional rise:

In the last quarter of 2007, there were 1.6 unemployed workers for every job vacancy.  By 2009, this had jumped to six unemployed workers for every job opening and, by the end of 2011, the ratio was still an elevated 3.8 unemployed workers for every job opening.  No wonder the rate of long-term unemployed has not improved to normal inter-recessional levels!

This recession really is different. Long-term jobless workers have three things working against them:

1.) The workers whose skills are in shortest supply will be rehired first.  Those workers that are unemployed the longest, tend to have skills that are not required by potential employers or work in sectors that are not hiring (i.e. manufacturing, construction).

2.) Workers who are unemployed for long periods become discouraged and spend less time looking for work.

3.) Employers discriminate against workers that have been unemployed for long period, preferring candidates that are either currently employed or who have just recently lost employment.

Let's take a closer look at long-term unemployment in Europe and compare it to the United States.  European countries tend to have a very strong social safety net for their unemployed workers; of 20 countries surveyed, the median net income replacement rate was 60 percent over a two year period of unemployment.  This compares to only 43 percent in the United States, a level that was reached only after special measures were passed in 2008 and 2009 that allowed unemployed workers to collect unemployment insurance benefits for much longer periods.  Prior to that, the income replacement rate in America was a paltry 14 percent or one-quarter of the rate of European income replacement.

Some suggest that the changes that improved America's income replacement rate during and after the Great Recession resulted in a higher long-term unemployment rate ranging from adding 0.4 to 1.8 percentage points to the overall unemployment rate.  Dr. Burtless believes that the actual impact of increased government "generosity" on the unemployment rate was closer to the low end of this range for two reasons:

1.) Less than 75 percent of unemployed workers qualify to collect UI benefits.  This may have resulted in non-qualified workers finding employment more quickly since there is less competition from workers covered by UI.

2.) Government payments of UI increases the consumption levels of the unemployed, resulting in increased total demand for goods, services and ultimately, labor.  

Given all of this information, why should we be concerned about long-term unemployment?  Discouraged long-term unemployed workers may leave the workforce long before they are ready to retire or may end up taking jobs that are a poor match for their skills.  This has an impact on the overall economy by lowering output and will ultimately result in higher demands for federal programs like Medicaid and Social Security Disability Insurance.  

As well, long-term unemployed eventually disappear from the radar screens of policymakers.  They disappear from the consciousness of politicians, the media and the general public.  Their impact on future policies to aid the unemployed is minimized.

What can be done to help the long-term unemployed?

1.) Since the Federal Reserve has lowered interest rates to nearly zero, domestic demand for goods and services cannot be increased with changes to monetary policy (despite Mr. Bernanke's protestations to the contrary).  The only other way to stimulate domestic demand is through government stimulus, although, in this time of a highly politically polarized Congress and high debt, this is unlikely to occur.

2.) Replace more of the income of the long-term unemployed.  This too is not likely to occur.

3.) Upgrade skills through formal training.  Once again, this costs money.

4.) Selectively subsidize the hiring of long-term unemployed workers by offering financial inducements to potential employers who hire long-term unemployed.  This could take the form of temporarily waiving the employer portion of the payroll tax.

5.) Use a "shared-sacrifice" approach by giving employers the discretion to cut hours of work rather than jobs during an economic downturn, thereby lowering the number of permanent lay-offs and long-term unemployed.  

Dr. Burtless closes by noting that the nature of recessions is changing and that employment is slower to recover than in the past.  Unfortunately, there are no easy solutions and the current federal government debt load and fractious Congress have made the solution to the long-term unemployment conundrum even more difficult to solve.