3 Common Misconceptions About Long-Term Unemployment

Unemployment

Source: http://www.flickr.com/photos/kentuckyunemployment/

Long-term unemployment is incredibly destructive, damaging not just individuals but their friends, family, and even society at large. These are people who, not for a lack of trying, are no longer contributing to the economy. With the crisis fading slowly into the past, the question remains why is long-term unemployment so persistently high following the late-2000s crisis?

Understanding the answer to this question could help prevent a similar phenomenon in the future. Here are some common misconceptions about why the long-term unemployment rate is so high.

1. Only a small percentage of the unemployed have been without work for a long time

The U.S. Bureau of Labor Statistics defines long-term unemployment as labor force participants who have been out of work for 27 weeks or more. As of July, 37 percent of the 11.5 million people without work in the U.S. fell under the umbrella of long-term unemployed, a near-record rate that is down only slightly from post-crisis highs of more than 40 percent in 2012.

This high rate of long-term unemployment is agitated by the fact that the seasonally adjusted average duration of unemployment in July was 36.6 weeks, up by one full week on the month but down by two weeks on the year. The median duration was 15.7 weeks, down by a fraction of a week on the month, and by about one week on the year. These figures, as ugly as they are, may also cloud the full picture.

Headline unemployment data do not include would-be workers who have given up searching for a job entirely and have dropped out of the labor force. The labor force participation rate was 63.4 percent in July, down substantially from its pre-crisis level of about 66 percent.

2. Extended unemployment benefits have been a major contributor to the problem

Unemployment insurance is a joint venture between federal and state governments that was effectively established with the Social Security Act of 1935. In spirit, unemployment insurance is a safety net for workers who have been laid off during hard times. Financed via the Federal Unemployment Tax Act of 1939, which imposed certain payroll taxes on employers, workers laid off due to reasons outside of their control have historically been entitled to about 26 weeks’ worth of compensation, designed to ease the transition between jobs.

The program has evolved dramatically over the years — perhaps most substantially during the economic crisis in the 1980s — and was supplemented heavily in the wake of the late-2000s financial crisis. Unemployment hit a post-crisis high of 10 percent in October 2009. In November of that year, the U.S. House of Representatives passed the Worker, Homeownership, and Business Assistance Act of 2009 (H.R. 3548) that, among other things, granted 20 additional weeks of unemployment benefits to those in states with an unemployment rate above 8.5 percent and 14 additional weeks to those in states with lower unemployment rates.

The act wasn’t the first or last of its kind. Similar provisions increased unemployment benefits in particularly hard-hit regions to an upper limit of 99 weeks, an unprecedented long safety net ostensibly designed to address a sick labor market. However, economists have argued that the well-meaning plan may have some negative side effects. Rob Valletta and Katherine Kuang, researchers at the Federal Reserve Bank of San Francisco, examined the issue in 2010.

The researchers suggested:

“Increased availability of UI benefits theoretically can increase unemployment duration through two primary behavioral channels. First, the extension of UI benefits, which represents an increase in their value, may reduce the intensity with which UI-eligible unemployed individuals search for work. This could occur because the additional UI benefits reduce the net gains from finding a job and also serve as an income cushion that helps households maintain acceptable consumption levels in the face of unemployment shocks (Chetty 2008). Alternatively, the measured unemployment rate may be artificially inflated because some individuals who are not actively searching for work or who are unwilling to take available jobs are identifying themselves as active searchers in order to receive UI benefits.”

The researchers suggest that, in 2010, extended UI benefits accounted for about 0.4 percentage points of the 6 percentage point increase in national unemployment after the crisis.

They commented: “Although economists have shown that extended availability of UI benefits will increase unemployment duration, the effect in the latest downturn appears quite small compared with other determinants of the unemployment rate.”

Many of the extended UI benefits programs are in the process of being wound down, with many of the programs being axed in light of the budget negotiations in Washington.

3. Policy uncertainty has had a minor impact on hiring

The Beveridge curve is a tool used by economists to graphically represent the relationship between job openings and the unemployment rate. When the economy is behaving more or less normally, the data fit the curve fairly tightly. However, during recessions, the curve shifts outward, meaning that despite there being an increased number of job openings, the unemployment rate has not lowered.

There are several reasons this can happen. One is that extended unemployment benefits have de-incentivized the unemployed from filling the open positions, which was previously discussed. Another possible reason is that unemployed workers simply don’t have the skills necessary to fill the vacant jobs, which will be discussed later. A third reason, and one championed by Federal Reserve Bank of San Francisco researchers Sylvain Leduc and Zheng Liu, is that uncertainty about monetary and fiscal policy has accounted for the majority of the post-crisis shift in the Beveridge curve.

Beveridge 1

Source: http://www.frbsf.org/economic-research/publications/economic-letter/2013/july/us-labor-market-uncertainty-slow-recovery/

The researchers said: “When uncertainty rises, businesses become more hesitant to hire. They reduce recruiting efforts by raising hiring standards, increasing the number of interviews, or simply not filling vacancies.”

They estimated that high amounts of policy uncertainty in the wake of the recession have accounted for as much as two-thirds of the shift in the Beveridge curve, increasing the unemployment rate by as much as 1.3 percent by late 2012. The implication of this is that without policy uncertainty, unemployment could have already been as low as the 6.5 percent targeted by the U.S. Federal Reserve.

Beveridge2

Source: http://www.frbsf.org/economic-research/publications/economic-letter/2013/july/us-labor-market-uncertainty-slow-recovery/

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