Common Misconceptions About Long-Term Unemployment

Source: Thinkstock

Source: Thinkstock

Defined by the Bureau of Labor Statistics as labor force participants who have been out of work for twenty-seven weeks (six months) or more, long-term unemployment is both a symptom and a sickness. As a symptom, it indicates economic anemia caused by weak demand and structural unemployment, which usually comes in the wake of an economic shock like the financial crisis. As a sickness, it can ruin the career or lives of those affected, destroying not just savings but also reducing a person’s likelihood of being hired and reducing earnings potential for many years.

Because of this, excessive long-term unemployment is one of those outrageous economic problems that demands action. The longer the long-term unemployment rate remains high, the more damage prolonged joblessness inflicts on individuals, families, and the economy at large. And if you haven’t caught the memo yet, the United States is sick. In October 2014, 2.9 million Americans accounting for 32% of the total unemployed had been looking for work without success for more than six months. Granted, this is down dramatically from post-crisis highs in 2010, but it is still well above even the highest peaks previously recorded.

In the U.S., we have typically tried to treat long-term unemployment with fiscal policy, but in the wake of the financial crisis, the medicine hasn’t been very effective. Unemployment insurance is the first prescription, but it is a stopgap solution designed to keep people on their feet while they find new work. Even dramatically extending unemployment insurance benefits, which was done in 2009, only treats the symptoms of unemployment, not the causes.

The government has invested in education and jobs training programs in the hopes of narrowing any skills gaps in the labor force, but these programs alone are insufficient, and work more like a therapy than a cure. Policies, fiscal or otherwise, designed to address the problem have been suggested by organizations like the Congressional Budget Office, but there is little agreement on the feasibility of implementation, let alone any sort of political alignment. Payroll tax cuts meant to stimulate hiring means spending cuts somewhere else, while increased spending on job training programs means finding free cash flow in a government already running enormous deficits.

Part of the problem is that the causes of long-term unemployment are complicated and often structural and systemic, which makes understanding the problem and designing solutions difficult. And since the nature of most viable solutions involve the exercise of fiscal policy, finding the political willpower to implement them can seem impossible, especially with the current Congress. Agitating the issue are abundant misconceptions about what the problem actually is and the efficacy of current and proposed treatments. So beginning with the scope of the problem, it makes sense to unpack the issue and try to understand what’s going on and how we can address it.

Misconception: The problem isn’t really that bad

At the time of writing, there were 2.9 million long-term unemployed in the U.S. accounting for 32% of the unemployed. We mentioned earlier that this was historically high — even higher than peaks recorded following earlier economic crises — but the graph above should illustrate how high the current level of long-term unemployment actually is. The current levels of long-term unemployment, as well as the current mean duration of unemployment, are unprecedented. Over the past five years, more people have been unemployed for longer than at any other point in the past half century. Not since the Great Depression has chronic joblessness been such a severe problem in the U.S.

The damage associated with this joblessness is enormous. According to the Urban Institute, “Being out of work for six months or more is associated with lower well-being among the long-term unemployed, their families, and their communities. Each week out of work means more lost income. The long-term unemployed also tend to earn less once they find new jobs. They tend to be in poorer health and have children with worse academic performance than similar workers who avoided unemployment. Communities with a higher share of long-term unemployed workers also tend to have higher rates of crime and violence.” This is a recipe for an economic death spiral.

(Photo by Alex Wong/Getty Images)

(Photo by Alex Wong/Getty Images)

Misconception: 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 twenty-six weeks 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% in October 2009, and in November of that year the House of Representatives passed the Worker, Homeownership, and Business Assistance Act of 2009 (H.R. 3548) that, among other things, granted twenty additional weeks of unemployment benefits to those in states with an unemployment rate above 8.5% 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 unprecedentedly large safety net ostensibly designed to address a sick labor market. However, economists have argued that the well-meaning plan may actually have negative side effects, such as removing incentives for the long-term unemployed to find work. 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. A one week extension in unemployment insurance benefits has been estimated to increased the average duration of unemployment by 0.1 to 0.2 weeks.

However, the research also shows that the impact of extended UI benefits on total unemployment and on average duration of unemployment are small relative to other forces, such as macroeconomic conditions at the time of job loss. So while it is fair to point at extended unemployment insurance benefits as a possible contributor to high unemployment and high average duration of unemployment, it is a minor contributor.

Moreover, the extension of benefits is an economic stimulus. As extensions to the benefits program were debated in Congress, the CBO argued that “allowing EUC to expire would be harmful to millions of workers and their families,” and “counterproductive to the economic recovery.”

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