The Long-Term Unemployed: Consequences and Possible Cures-Becker

Greater unemployment is a casualty of every recession, and the so-called Great Recession is clearly no exception. The unemployment rate grew from under 5% to just over 10% at its peak, and has fallen during the past few months a little to 9.7%.  Most forecasters are predicting only a gradual further decline in the unemployment rate during 2010, and some even predict that this rate will increase before it continues to fall again. Aside from its level, the most disturbing feature of the unemployed is its composition since many of them have been without a regular job for over six months.

Men and women who are unemployed for a relatively short time-say for no more than a few months- create relatively few problems for themselves or the economy. They can usually finance their consumption while unemployed- such as on housing, food, and other basic expenses- out of their own savings, unemployment compensation payments, and from loans from family and friends. The long-term unemployed are the major problem. And the fraction of the unemployed who have been out of work for six months or more increased greatly during the Great Recession to reach over 40% of the unemployed in February 2010. The average period of unemployment for these long -term unemployed is about 7 months. Only a year earlier, in February 2009, the long-term unemployed constituted only 22% of the total number of unemployed persons, and even that percent was up from its share of the unemployed at the beginning of the recession in December 2007.

The long-term unemployed tend to lose confidence in their abilities, their resources to finance their consumption gets depleted, and their skills begin to depreciate. They may be forced to uproot their families to move to new communities where employment is more readily available. As a result of all these factors, their family life undergoes considerable stress, which leads to marital problems, and not infrequently to divorce. These effects are all reasons why special attention has to be given to reducing the rate of long-term unemployment, and mitigating some of its harmful effects.

In most respects, the characteristics of the unemployed are similar during this recently ended recession as it has been during all prior recessions, and even the Great Depression of the 1930s. Unemployment is concentrated among the young, less educated, and low skilled. For example, according to the March 10^th report of the Bureau of Labor Statistics, (seasonally adjusted) unemployment rates in February of this year was 16% for high school dropouts, 11% for high school graduates, only 8% for persons with some college or associate degrees, and a quite low 5% for persons with a bachelor’s degree and higher levels of education. Similar differences are found by age and skill level. So despite all the attention given to the growth in the unemployment of highly educated persons from the financial sector, the burden of increased unemployment is still being mainly borne by the young and less skilled.

Although more educated and older workers are far less likely to become unemployed, once they do they have a much tougher time finding jobs that pay them close to what they had been getting while employed. This is why college educated and older workers constitute a much larger percent of the long term unemployed than they do of the total number unemployed. These differences in long-term unemployment are easy to understand. Many kinds of low paying jobs are available to the young and high school dropouts in all parts of the country. This means that these workers can relatively easily find other jobs if they become unemployed, even though the new jobs may not last so long and they may have to seek still other jobs. Finding other jobs with comparable pay to their old ones is much harder for more skilled and experienced workers since they are more specialized in their knowledge. They may have to move to another region to get suitable employment.

The fraction of workers who have been unemployed for at least 6 months tends to rise for a while after a recession, even after the overall unemployment rate starts to fall. This is not surprising since the fact that a person has been unemployed for many months is an indication that he or she cannot easily find a new job. As a result, the long-term unemployed are less likely than other unemployed workers to find jobs quickly after the economy begins to pick up.

In several of the prior recessions, the unemployment rate came down slowly after the recession was over. The Great Recession ended during the third quarter of 2009, yet the unemployment rate continued to rise for a few months after that. It has now started to decline slowly, and is likely to continue to fall at a slow rate. Regrettably, the decline may be particularly slow in the present situation because Congress and the President have created too much uncertainty about, among other things, health care costs to employers, taxes on higher incomes and on businesses, taxes on carbon emissions, caps on the pay of some executives, and the new regulations of lenders. Businesses are reluctant to take on many additional employees until they become more certain about their costs, and the direction the economy is moving in.

Unfortunately, several remedies that have been suggested to reduce the rate of long-term unemployment will be ineffective. For example, many people believe the solution is to retrain the long-term unemployed. However, retraining adults of all ages, but especially older workers, have generally been failures: it is much too costly relative to the benefits in terms of new jobs.

A current proposal in Washington is to give companies a subsidy if they hire workers who have been unemployed for longer than a few months. The problem with this proposal is that the Job Openings and Labor Turnover Survey (or JOLTS-I am indebted to Ed Lazear for bringing these data to my attention-) shows that even during this period of high unemployment, there are about four million new hires every month, and slightly more separations than that when employment is falling. So the great majority of the new hires that would receive a subsidy under such a proposal to stimulate employment would have occurred anyway. The program would end up being another costly subsidy to businesses.

The only real remedy for the long-term (and other) unemployed is to have the economy grow fast, as it did after the severe recession in 1982 when unemployment peaked in December of that year at 10.8%, and then fell rather rapidly. There is no magic bullet to accomplish this, but I do believe it would help a lot if the leaders in Washington did not try to radically transform various aspects of the economy while we are recovering from a serious recession, and thereby magnify the high degree of uncertainty that is typically caused by a recession. Instead, they should be concentrating on fighting the recession, and stimulating long-term economic growth.

 

 

 

Comments

[Jeff]

Wouldn't it be better to eliminate the costs of employment. There are several taxes that go into effect when you employ someone. Why not make it cheaper to employ people?

[Ted]

Uh, do you mind helping me out a bit. You first write the young and those with lower educational attainment are suffering from severe job losses. Then you go on to say that jobs are easily available to the young and those with lower education. Something doesn't jive there ...

Also, Mr. Becker, I'm surprised at you. The father of rational addiction, the ultimate statement of the hyper-rational individual is now conceding that business people are retarded. That they are just stupid.

Yes, obviously they are worried about the costs of a health care bill which has been basically in its same form for months. That has been scored by the CBO. That has been analyzed inside and out by every policy tank. That doesn't take effect for several years.

Yes, obviously they are worried about the costs of tax hikes on them. Policies they could look up with a basic google search.

Yes, obviously they are worried about the costs of cap and trade which has been basically in its same form for months in the house. That has been scored by the CBO. That has been analyzed inside and out by every policy tank. That doesn't take effect for several years. Did we mention the costs to consumers? It's extremely small, according to every non-partisan analysis.

Yes, obviously they are worried about caps on executive pay. Oh wait, nobody who actually employs the people who are unemployed are even eligible. I'm sure those young and high school dropouts you are looking at would love a a job at AIG, somehow I don't think they are going to get it though. So, clearly they are holding back the employment picture.

Yes, obviously the market is scared about new regulations on lenders. That's obviously why they aren't taking out loans now. Think about this. If business people were "scared" about lending in the future, wouldn't they try to get the loans as this very moment and expand at this very moment to prevent this travesty? And yes, clearly, our lending standards in recent years have been top-notch so obviously the business community would prefer them to stay the way they were prior to this mess. Obviously the business community wants a replay of this.

So, for your story of "uncertainty" to hold water, we have to immediately assume that business owners are stupid. In which case, we don't really need the uncertainty story to explain anything. Let's cut out the middle man and just call them stupid.

I have one question for you Mr. Becker. Is what took the business community so long to re-hire under the Bush administration due to the uncertainty of his policies ... ? Perhaps you didn't notice, but the labor market wasn't exactly a glowing success story under Bush, and it took an artificial housing boom for the idiot business owners to realize how certain they were of his policies. And by your primitive correlation logic, can we also conclude that stupid business owners were so certain and so excited about the Clinton health care plan and the tax hikes that they started hiring and the economy boomed? Obviously that must be what happened.

Give me a break. When will people realize that economic fundamentals are far more important that whatever policy the government comes up with?

Also, could I purpose a different hypothesis on why business people aren't hiring. Could it be, and I'm just making a wild conjecture here, a combination of the following:

(i) commercial lending is still incredibly weak, (ii) consumer loans are slightly down, (iii) household starts are still very low harming the construction industry, (iv) a continuing weak retail market, (v) continued deflationary pressures (seen the CPI lately?) posing a risk to the recovery making employers more skeptical of a sustained, robust recovery, and (vi) a continually weak export market.

I'm just guessing that those six things might be playing a very minor role, but what do I know.

[st]

"Although more educated and older workers are far less likely to become unemployed, once they do they have a much tougher time finding jobs that pay them close to what they had been getting while employed. This is why college educated and older workers constitute a much larger percent of the long term unemployed than they do of the total number unemployed. These differences in long-term unemployment are easy to understand."
The author omit one key factor of late 90 and 2000: massive production of MBAs occupied key hiring post (just look the MBA school ads voice the networking as key enrollment of MBA schools). The young MBAs with a year or two in the industry is less likely to hire any older experienced workers. In security all written on their face during the interview. They are most likely hire less qualify personnel to keep the position safe. It is self defense mechanism. You can not blame to do so. Especially, when someone come from the MBA program that do not require any work experience as requisite upon entry. it is human nature and fighting for the survival (the fittest is rather sickening). The overall impact on the industry and society is damaging beyond repair for at least one generation. (been there, 1st hand experiences... I am currently employed by a PhD with more than 25 years of industry experiences, I think the prof should step out of school and interview few of the high ranking workers for a change... it would do a lot of good to change mindset).

[Jack]

Ted, Good points and typically it seems our Profs do lean heavily on the fundamentals and conclude that next to nothing can be done by gov to improve things. And, agreed, were the economy rolling along all the elements up before Congress would be small spuds as they probably are even in this deep recession.

They seem to assume there are fundamentals that "should" improve hiring in the near future, but I wonder. For over a decade I was nervous about the "housing boom" and expected that when it flattened out we'd have big problems and that w/o it ending in the financial crash.

Consider, at the peak we had 2.5 million starts a year, despite household formation of 1.2 million or so. The housing industry is not just the 2.5 million starts times $250k median selling price, but that of most buyers buying new appliances, furniture, furnishings, and electronics. Additionally there are the commissions on loan originations, realtors fees for both the new and old home, and the long tail of interest costs on new larger loans. Contractors for the city are busied running utility lines that are built now but paid for over time.

Today housing starts are 600,000 or so and likely capped somewhere near the million mark while excess housing stock is, hopefully! soaked up. (I do expect some uptick this summer as the foreclosures combines with few starts has skewed the product mix in many markets.. ie a 500k foreclosure for half that price might be a great deal, but still beyond the means of younger starter home buyers and perhaps are not in the right place either.)

I don't know how many full time job equivalents the building of a new home accounts for but say it is 3 - 4 so being off by 1.5 million starts might add to 5 million jobs, though some will find work repairing and remodeling existing housing or have some other craft to ply... if the jobs exist.

Retailing? What's the outlook for that sector? In addition to the recession and it seeming we've been over retailed for a long time there are the productivity increases of "box stores" and the internet that means what retailing is done will require a lot few people.

Then, weak commercial is related to weak retailing and likely some effect of computers enabling fewer people in fewer cubicles to handle more business.

Well, to keep this reasonably short, I don't forsee us climbing out of the ditch without government leadership incenting infrastructure repairs and upgrades, and energy conservation/alternatives industries.

Recently I learned that Euro had 17 million Chinese visitors at $6,000 a visitor while the US had just 300,000, apparently due to visa difficulties. If forgoing $50-$100 billion of visitor income iis from "terrorist fear" it would seem the terrorists are winning!

BTW if folks have difficulties posting here, it seems the thing has a time limit after which you'd have to copy your post, refresh the page, paste, and then type at least one character.

[AndyC]

We would need another bubble and another debt binge and credit expansion to make any meaningful gains in employment.

There is no recovery

We have been in an economic and employment bubble since 1984 all driven by credit growth and now we are out of credit.

We need 100k jobs just to keep up with demographics, we have to find jobs for the 8.4 million currently unemployed, boomers will be putting off retiring for obvious reasons so that doesn't help, where do we come up with 200 to 300k jobs per month for years on end?

We don't, there isn't any way we could.

The only time we have ever added numbers like that was in 1998 and 2005 during the peak years of two of the most substantial bubbles in history

[Jake]

Unfortunately the consumption expectations of far too many citizens of the US have outgrown their ability to produce meaningful economic output.

This is the root of the problem. It has no easy solution.

[Jack]

Jake: For most of us it feels like output is not keeping up, however the approximate 2.5% annual increase adds to a doubling over the last 30 years.

http://www.bls.gov/lpc/prodybar.htm

........ Trouble is virtually all of the gains were skimmed at the very top:

http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/

........... leaving most, as you describe, in an economy of surplus capacity and far too little demand. Still, some political factions (and our Profs here) favor a further pounding down of wages for working folk. The soaring inequality is not our only problem, but as those in the topmost income tier have a far lower propensity to spend (how many homes or bottles of wine can any one family consume?) than the struggling middle class for which there is an urgent need for any stray buck that comes in, increasing middle and lower incomes would be a part of the solution.

Consider: As one example Walmart employees; despite the company being one of the richest in world history most of their employees are not paid a living wage, can't afford to buy homes, computers, cable and broadband services, new cars, and as many are eligible for various low income subsidies they add one billion more to the deficit every year.

[Rick]

The West has spent the last 50 years encouraging women into the formal workplace. Which is Good. But that means we've also roughly doubled the labour pool without doubling the number of jobs. That's massively deflationary. So is having a baby boom generation spending longer in the workplace. It's why - today - it take two people to afford a home or to raise children.

Recent booms have masked the underlying deflation - and now it's apparent that stimulating a further boom will be unsustainable. The West needs to look strategically at what modern work *is*. Is there enough work? Is it meaningful, or are we churning out graduate table-waiters? Will the 'permanent role' survive as a viable concept, or will businesses move toward a mass project-hire model? What happens to society then?

We've ignored the demographic elephant in the room for too long, and now it is sitting on us.

[Chris Graves]

I think Andy C has hit the nail on the head in his comments above. Professor Becker says, "The only real remedy for the long-term (and other) unemployed is to have the economy grow fast, as it did after the severe recession in 1982 when unemployment peaked in December of that year at 10.8%, and then fell rather rapidly. There is no magic bullet to accomplish this, but I do believe it would help a lot if the leaders in Washington did not try to radically transform various aspects of the economy while we are recovering from a serious recession, and thereby magnify the high degree of uncertainty that is typically caused by a recession. Instead, they should be concentrating on fighting the recession, and stimulating long-term economic growth."

Yes I agree in a way, but we do not want to create more bubbles just to get us out of the momentary downturn only to create an even more severe correction later. What we need is to weather this storm and allow the credit markets to bring savings equal to investment so that long-term growth is sustainable. Such a policy that would allow interest rates to rise to levels determined by the credit market might very well prolong the current economic sluggishness or even create a "double-dip" recession. But over the long-haul, the recovery would be more substantial and sustainable indefinitely.

As we discussed several months ago, there are hidden benefits to recessions and slower growth that we tend to overlook. For example, the Great Depression and the recession of the early 1980's prompted a retrenchment of socially libertine tendencies that tend to accompany rapid economic growth that has not been properly funded in real terms. There can be a need for social correction as much as there can be a need for economic correction, and they tend to go coincide.

[Bubba]

GM wound up putting more money into health care than steel and went bankrupt. We have enormously expensive and throughly mediocre health care. If we don’t fix that, we are doomed.

[Jack]

Rick, it's interesting to speculate on how things would be had women been more reluctant to join the workforce. As you point out surely it has contributed to surplus labor in the workforce (and the effect of working folks sharing in the productivity doubling of the last 30 years that I point out above) and something, perhaps much, has been lost from their unpaid contributions as home, in the community and volunteer efforts.

I suspect that had we been short of labor we'd have made more capital investments and developed a higher per capita productivity; today it seems some fair percentage of our jobs are of a "make work" sort that would disappear in a labor short environment.

Also, it's likely that the labor shortage would have drawn more immigration as well has yet more outsourcing. I end up wondering if even with a smaller, theoretically more valuable (per capita) workforce would the productivity gains have "trickled down" any better than they have over the last 30 years.

And yep, it does seem we've been "saved" by one boom or bubble since, and perhaps including, WWII and it's certainly a question today whether a sustainable full employment is possible or likely. There's certainly the work to be done and taking care of our aging boomers comes quickly to mind. But not many oldsters have the wherewithal to pay for care in their old age and certainly not if they've Alzheimers or or dementia, making such care a cost factor to a different group. And we've similar problems in infrastructure maintenance, energy conservation and other "green jobs" ie it's pay now and derive the benefits later, much later in many instances.

Part of your "demographic elephant," in a nation of per capita productivity being some $50,000 is that of the last quarter century's "tide" NOT "lifting all of the boats and is something that will need correction if we are to continue to have the "strong middle class" a democracy requires and what we like to think of as the American standard of living.

[Nicholas]

Jack,
Democracy requires a strong middle class. That's your typical asinine comment which proceeds from a pure ignorance of such basic texts as Robert Filmer's democracy-demolishing essays from the seventeenth century. The only way you may have heard of Filmer is through reading Cliffs Notes of John Locke. And I've no doubt that you're unaware that Locke plagiarized, as his own contemporaries knew--and as Warburton pointed out later. If you took the trouble to read penetrating minds like Filmer's I wager you wouldn't have all the time to scribble pointless comments here at Becker-Posner. Nothing could still your tongue (and fingers) so well as a fuller brain.

[Jack]

Nicholas: Thanks, but whew! you sound a bit testy!

I .... guess? the intent of quoting your long-dead plagiarists and theocrat is not just an attempt to refute the widely held opinion of democracy (and the related mixed economy) requires an educated and strong middle class (one hopes is sharing in the fruits of their labors) but to oppose democracy itself.

Anyway, on this little traveled site where space is hardly at a premium, perhaps you could share an updated, more relevant to our times, version of your centuries old theories. Perhaps our brains will be the fuller for your efforts.

[Rick]

Jack,
I think we're in broad agreement here. Some investments are better for society and economy than others. For example, investment which stimulates construction and engineering employment delivers more than investment which stimulates retail and hospitality employment. The tragedy of the US and UK economies over the last 30 years is the switch to service sector employment under the cover of financial services growth.

Now, when we need to stimulate employment, it's difficult to do so through infrastructural investment, such as building roads, hospitals and power stations. Because you can't build those things with table-waiters and contact centre workers.

[ohwilleke]

The cheapest way to deal with long term unemployment may simply be to create jobs directly.

Promise everyone a job, pay a modest wage to those who show up, and accomplish whatever in the public interest seems possible to the local government official charged with using that labor in the best way possible under the circumstances right now.

There is never a shortage of work to be done, just a shortage of work that it is cost effective to do. Once you commit to paying for the work as a matter of social policy, the official would look to see what the highest value work that the workforce could do that was not being done was and do it. Maybe there is a backlog of filing. Maybe there is litter to client or grounds work to do. Maybe there are park shelters to be built, or repairs to be made to government owned infrastructure. Maybe there are crosswalks that could use crossing guards. There is always something.

Would the work done be worth in the market place the price paid to the workers? Probably not. The value of the work done might well not support even a minimum wage worker. But, coming up with the best short term use of someone's labor is surely better than paying people to sit in lines filling out unemployment paperwork and paying people to sit at home watching TV because they have exhausted all reasonble job searching options.

When one considers the public expenditures associated with someone being unemployed, and the harm that unemployment can do to someone who is employable, the marginal additional cost of paying wages may be pretty modest and the value of the work done by those on ad hoc work duties may exceed the marginal cost to government of hiring them.

India has tried a similar program with considerable success, and the program has also greatly strengthened the economic hand of workers vis-a-vis illegal labor practices induced by weak labor markets.

While expensive, creating jobs directly is far cheaper and effective than alternatives like funding defense contracts for programs we don't need, cars for clunkers (that helps non-U.S. workers more than U.S. workers), or the new home buyer credit (which subsidized each additional home purchase induced by the purchase to the tune of $45,000 per house).

The program would also leave us with the moral assurance that everyone who wants to work for a living can do so.

[arnel]

i hate unemployemnt the us econemy needs to be fix like today.

[Jack]

The title of Becker's essay includes "possible cures" but he offers few with only the "hope" of the rapid growth just after the 1982 recession. That was long ago in a time when oil prices had dropped dramatically, computers and other electronics were selling well at high prices, and outsourcing was in its infancy. If we thought this deep recession was cyclical perhaps waiting patiently and hoping would be the best course, but if we think it's structural in nature as I do, then some of the suggestions as Rick and ohwilleke put forth seem more proactive.

I share the reluctance of most in gearing up too much government employment, but with the worst unemployment being that of the young and unskilled, along with older workers who may never regain their jobs, it would seem there are benefits of employing younger folk who could gain some workplace skills in about any job and in some situations learn from, otherwise unemployed, older people. There are lots of objections of the "take too long, recession will be over", or that the work done is not worth what was paid.

But, as bleak as recovery from this recession appears, it's good to recall that the "end of the Depression" came about a decade after if began with the massive spending on WWII, and with perhaps half of our workforce learning entirely different jobs in a short time frame.

I'm not favoring war as a "solution" only what can be done in a hurry through leadership and public investment. I'd hope the direction would be that of a "greener" more sustainable economy and one that serves our people to a greater extent than the one we see crashing around us as a result of too much self-serving political power held by "banking" insurance, and other corporate entities. At one time the fear of a democracy was that the people would vote themselves too many benefits, instead we're suffering much more from too much corporate power and the lack of a sensible campaign funding mechanism that makes Congress something of a fully owned subsidiary.

Posted by: Jack |

[Bill Mehlman]

What a brutal opening sentence. "Greater unemployment is a casualty of every recession" implies that the unemployment suffers in a recession. It may be a symptom, or a result, or a trauma-inducing phenomenon, but clearly the unemployment is not a casualty.

[nfl jerseys]

as bleak http://www.new-jerseys.com as recovery from this recession appears, it's good to recall that the "end of the Depression" came about a decade after if began with the massive spending on WWII, and with perhaps half of our workforce learning entirely different jobs in a short time frame.

[sesli chat]

The West has spent the last 50 years encouraging women into the formal workplace. Which is Good. But that means we've also roughly doubled the labour pool without doubling the number of jobs. That's massively deflationary. So is having a baby boom generation spending longer in the workplace. It's why - today - it take two people to afford a home or to raise children.

Recent booms have masked the underlying deflation - and now it's apparent that stimulating a further boom will be unsustainable. The West needs to look strategically at what modern work *is*. Is there enough work? Is it meaningful, or are we churning out graduate table-waiters? Will the 'permanent role' survive as a viable concept, or will businesses move toward a mass project-hire model? What happens to society then?

We've ignored the demographic elephant in the room for too long, and now it is sitting on us.

[john slingerland]

love the congress they spend trillions to help poorly run banks and companies but can not extend benefits for the long term unemployed the people who said they can not pay for it should look at the billions spent recently did they have money for that no they did not but they passed it anyway well now i have exhausted my benefits guess government does not6 consider me unemployed now so pelosi reid and oboma whate we then???

[Truck Rental]

All that unemployment issues are getting really weird, specially in matter of long term - maybe they are not really unemployed? after all - the do buy new trucks and cars and do move away to fancies houses..something fishy.

[oil paintings]

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[oil paintings]

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[guild wars 2 gold]

I think we're in broad agreement here. Some investments are better for society and economy than others. For example, investment which stimulates construction and engineering employment delivers more than investment which stimulates retail and hospitality employment. The tragedy of the US and UK economies over the last 30 years is the switch to service sector employment under the cover of financial services growth.I share the reluctance of most in gearing up too much government employment, but with the worst unemployment being that of the young and unskilled, along with older workers who may never regain their jobs, it would seem there are benefits of employing younger folk who could gain some workplace skills in about any job and in some situations learn from, otherwise unemployed, older people. There are lots of objections of the "take too long, recession will be over", or that the work done is not worth what was paid.

But, as bleak as recovery from this recession appears, it's good to recall that the "end of the Depression" came about a decade after if began with the massive spending on WWII, and with perhaps half of our workforce learning entirely different jobs in a short time frame.