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Long-Term Unemployed Still Recovering from Recession

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Long-Term Unemployed Still Recovering from Recession

April 4, 2016

Friday’s jobs report from the Bureau of Labor Statistics, at long last, contained some good news. The labor force participation rate, long a laggard of the economic recovery, finally cracked 63 percent.

The labor force participation rate, the share of people either working or seeking employment, was 66 percent before the recession, and bottomed out at 62 percent last year. As the labor market gets tighter, wage growth has started to pick up as well. While the unemployment rate did tick up by a tenth of a percentage point, that is likely good news if it means more people have started actively looking for jobs, rather than staying out of the labor force entirely.

However, on one metric the employment situation remains stubborn: long-term unemployment. The share of unemployed persons stuck without a job for 27 weeks or longer is 28 percent, as opposed to 19 percent pre-recession. That is down somewhat from 37 percent when the economy was at peak unemployment, but still worryingly high.

 

 

In absolute terms, the difference in the quality of the recovery for the short-term and the long-term unemployed is vast. The number of people unemployed for 26 weeks or fewer is only 1.3 percent higher than it was pre-recession. However, the ranks of those who have been unemployed for 27 weeks or more have swelled 69 percent since 2006.

The Great Recession has drastically altered the landscape of the unemployed. Prior to 2008, one could expect to be unemployed for an average of 14 weeks. Even after previous recessions, the highest average unemployment duration even reached was 21 weeks in 1983.

However, after the Great Recession hit, average unemployment duration spiked to 41 weeks in 2011. It has since fallen to 28 weeks, but there is still a long way to go until it reaches the pre-recession level of around 17 weeks.

 

 

Long-term unemployment is a problem, and not only because it represents months or years of lost earnings. People who have been out of a job for a long period of time find it more difficult to get a new one, since employers are less inclined to consider resumes that show a large gap in work experience. In 2014, the latest data available, 35 percent of people who were unemployed 5 weeks or fewer found a job in the next month, ccording to a Bureau of Labor Statistics report. The rate for people unemployed over a year was just 11 percent.

Why have the ranks of the long-term unemployed remained so large in this economic recovery? One reason may be the extension of unemployment benefits. Normally such benefits can be claimed for the first 26 weeks of unemployment only, but during the recovery the period was extended to 99 weeks in many states.

Many have speculated that unemployment benefits increase the amount of time spent out of the workforce as individuals have less incentive to take jobs, a hypothesis illustrated in The Redistribution Recession by University of Chicago professor Casey Mulligan. This generates a vicious cycle—people are encouraged to spend more time out of work, which decreases their likelihood of being hired, which in turn keeps them out of a job for even longer, and so on.

Critics of this hypothesis argue that the termination of unemployment benefits may encourage people to take jobs that are not the best fit for them, reducing the unemployment rate but still causing inefficiency. However, given that longer unemployment durations reduce the likelihood of being hired, it is better to temporarily take a tolerable job than hold out for a great one. Extended unemployment benefits make choosing the tolerable job relatively less attractive.

What can be done about this? One idea, advanced by Economics21 director Diana Furchtgott-Roth, is to allow the newly unemployed to take their benefits in a single lump sum. This would not only reduce the incentive to hold out for more benefits, but would also enable individuals and families to finance moving expenses for relocation to an area of the country where the job market is better (such as the Great Plains). The downside is that this proposal might cost taxpayers more, if individuals who might be unemployed for only a few weeks get to take several months’ worth of benefits at once.

Whatever the solution, the problem of the long-term unemployed is clearly not one that has abated. Even as commentators celebrate a low unemployment rate and rising wages, remember that on some counts the recovery is not yet over.

 

Preston Cooper is a Policy Analyst at the Manhattan Institute. You can follow him on Twitter here.

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