Long Time Gone

Can American labor policies face the challenge of long-term joblessness?
Economist StaffJanuary 6, 2014
Long Time Gone

The budget deal that Republicans and Democrats cobbled together in December left several pieces of business unfinished. Among them was the fate of extended unemployment-insurance (UI) benefits. First passed in 2008 and extended several times since, these provide workers with up to 47 weeks of federally funded benefits after they have drawn the maximum their states allow (usually 26 weeks). America’s government has enacted such measures in every recession since 1957. The most recent extension expired on December 28, leaving roughly 1.3 million Americans suddenly cut off and setting the stage for a huge political battle early in 2014.

Republicans principally object to the extension’s cost — around $25 billion over the next two years. Some point out that supplemental UI benefits have been in place longer and paid out more than in past recessions. Of course, one reason for this is that a far larger share of Americans remain out of work now than when the recession began. In November 2013 America’s unemployment rate was 7.0 percent, still a full two points higher than its 5 percent level when the recession began in December 2007. There remain roughly three applicants for every open job. Even so, Rand Paul, a Republican senator from Kentucky and probable presidential candidate, says that extending UI benefits causes workers “to become part of this perpetual unemployed group in our economy” and “actually does a disservice to the people you’re trying to help.”

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Not extending benefits will probably cause the unemployment rate to drop. North Carolina stopped offering them in July; since then its unemployment rate has fallen by 1.5 percent, compared with a national average of 0.4 percent. But its labor force also shrank more than twice as much as the national average, suggesting that the fall in the jobless rate came not from people getting hired but because they left the labor force entirely.

Unemployment rate in recessions

Besides, unemployment benefits do not only help the jobless; they also boost aggregate demand. Unlike some other economic stimuli, these benefits tend to get spent quickly on consumer goods. The Congressional Budget Office found that extending UI benefits to the end of 2014 would boost GDP by 0.2 percent and increase full-time employment by 200,000. So cutting benefits, many say, would cost jobs.

Behind this debate lurks the darker shadow of America’s long-term unemployed. In November 2013 they comprised 37.3 percent of the total unemployed. Their number is much higher than it was when extended UI programmes ended in the previous three recessions (see chart). According to the Council of Economic Advisers, since 2008 23.9 millon Americans were out of work for long enough to receive extended UI benefits; without an extension, next year 4.9 million Americans will not receive benefits they otherwise would have done.

Some blame high long-term unemployment on globalization for shifting low-skill jobs overseas, or technology for replacing them. Michael Strain, an economist with the American Enterprise Institute, notes that during this recession firms have used temporary lay-offs — in which workers are laid off for a set period of time and then recalled — far less than in previous recessions.

But the biggest obstacle faced by the long-term unemployed may well be unemployment itself — a pattern known as “scarring,” where persistent unemployment itself stops them being rehired. A paper from the Boston Fed in 2012 found that, for people who had been unemployed for less than six months, as the number of available jobs rose, the jobless rate declined. For those out of work longer than six months, however, vacancies and the unemployment rate both rose. When one of the paper’s authors sent out 4,800 fictitious job applications, they found that inexperienced but newly jobless workers were far likelier to be called back than the experienced but long-unemployed.

the long-term unemployed

President Obama has proposed several policies aimed at helping the long-term unemployed. One would set up a National Infrastructure Bank and spend $40 billion on deferred-maintenance repairs. Another, the Community College to Career Fund Act, would award grants to educational institutions and state and local governments for better job-training programs. Congress has not approved them. In 2010 it passed a payroll-tax exemption for employers who hire the unemployed; this has since expired.

America is hardly the first country to face this problem. Across the European Union in 2012, the long-term unemployed comprised 62 percent of the total unemployed — a far greater share than in America, but around the same level it was in 2000. Few European countries share America’s odd aversion to active labor-market policies. Denmark, for instance, keeps unemployment low with flexible labour laws, relatively high unemployment benefits and education and job training. Germany takes much the same approach. In 2011 Denmark spent 2.3 percent of its GDP on active labor-market policies, compared with 0.1 percent for the United States. Among OECD countries, only Chile spent as small a share of GDP as that.

Yet there is not much hope for improvement in America’s polarized and poisonous political atmosphere. Instead, Congress will begin the new year by once again debating UI benefits. House Democrats have introduced legislation to extend benefits for three months, paid for by trimming farm subsidies. Harry Reid, the Senate majority leader, will try to pass a retroactive extension, without offsets, soon after the Senate reconvenes on January 6, a move Mr Obama says he supports. That is essentially an election-year dare: Republicans will either have to violate a core principle and vote for a measure that will raise the deficit, or they will have to hand Democrats a cudgel with which to thump them all the way to November.

© The Economist Newspaper Limited, London (January 4, 2014)