Is Long-Term Unemployment Finally Returning to Normal?

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For all the fuss made and dollars spent it is not clear that the 2007-2009 recession was worse than the 1980-1982 downturn when Fed Chairman Paul Volker defeated inflation. For example, unemployment peaked at 10.8 percent then, higher than the 10 percent maximum in the most recent recession. However, this most recent recession and the weak recovery that has followed has been the undisputed champion for long-term unemployment.

The U.S. government defines long-term unemployment as a period of unemployment that lasts 27 weeks or longer, roughly six months or more. While overall unemployment was relatively normal for a severe recession, long-term unemployment peaked in April 2010 at nearly double its previous record high, with 6.8 million people counted as long-term unemployed. Such long-term unemployment is particularly important because of the potentially permanent damage done to human capital.

Economists debate whether long bouts of unemployment make applicants less attractive to employers with at least a little evidence that when overall employment is high, a long time between jobs is not held against you. However, the consensus is that job skills erode, hurting earning potential. Worse, at some point, especially for older people, a long spell of unemployment may become involuntary early retirement. If long-term unemployment causes the permanent loss of human capital, then policy makers should be addressing the problem.

A key point of debate among economists and policy makers has been over whether the repeated extension of unemployment benefits was encouraging long-term unemployment by allowing a longer job search in hopes of a better job. There were even worries of a large, permanent population of unemployed people, a return to the days when people stayed on welfare for decades. One large difference between Europe and the U.S. is that the U.S. has not had such a large group, but many worried that one was forming.

The emergency extended unemployment benefits finally ended on January 1, 2014, after lasting for four and one-half years, a year and a half longer than benefits were extended after any previous recession. Since then, the number of long-term unemployed has dropped by 800,000.

Further, this is not a case of people giving up and leaving the labor force. People did worry that because applying for jobs is a requirement both to collect unemployment benefits and to be counted as unemployed, once the benefits stopped people would also stop searching. However, the number of people not in the labor force only rose by 312,000 since the end of extended unemployment benefits. Some of those are for other reasons (retirement, family reasons, going back to school), so most of the drop in long-term unemployment appears to be because people got jobs (see an earlier column of mine with more numbers here).

In the labor market in general, layoffs are down, employment is up, wages are rising at a more normal pace. While the labor force participation rate is still at record lows since the 1970s era increase of women in the workforce, it has held steady for the last nine months. All things considered, it appears the labor market is returning to normal. We will not be Europe, at least not just yet.

Considerable research is needed to investigate exactly what has gone on the last five years, but early returns suggest that two contributing factors to the bad job market and persistent high unemployment were the repeated extension of unemployment benefits and the general trend during and post-recession to increase the amount of government transfer payments to people. A more generous social safety net likely led people to take longer to return to work, or to permanently leave the labor force.

The signature story of this recession in the history books will be the financial crisis, the auto industry bailouts, and the enormous stimulus spending that did not stimulate much of anything. However, after that people should pay attention to the long-term unemployed. When a government statistic hits nearly double its previous record, people need to ask why so that we can avoid a repeat of such a situation. If "compassion" just leads to longer spells of unemployment, we need to ask if such a policy is truly compassionate.


Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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