Global Economics

The U.S. Long-Term Unemployment Crisis Stumps Economists

By Peter Coy on February 07, 2013

Michelle Hall, 44, hasnt worked since last June, when funding ran out for her administrative job at Peaceful Acres Horses, a sanctuary in Pattersonville, N.Y. She applies for jobs online and usually hears nothing. Its a feeling of what Ill call emptiness, she says. I have a lot of skills that are very applicable across the board, from file clerk to middle management. Hall is the face of a new problem that remains poorly understood: chronic, long-term unemployment that continues even as job growth resumes across the economy. The rate of short-term unemploymentsix months or lessis almost back to normal. In January it was 4.9 percent of the labor force. Thats only 0.7 percentage point above its 2001-07 average. But the rate of longterm unemployment, 3 percent in January, is precisely triple its 2001-07 average, according to aBloomberg Businessweek calculation based on Bureau of Labor Statistics data. (Those two rates 4.9 percent and 3 percentadd up to the overall unemployment rate of 7.9 percent.) A striking statistic: The long-term unemployed make up 38 percent of all workers without jobs, double the average share and just a few notches down from the 2010-11 peak of 45 percent.
Economists are puzzling over what has changed. Is it generous benefits that make it easy to stay unemployed? Or erosion of skills that render people unemployable? Or discrimination by employers? Peter Diamond, an economist at Massachusetts Institute of Technology who received a Nobel prize for his work on labor markets, says that regardless of the causes of long-term unemployment, the harm it causes justifies strong efforts to stimulate the economy, so even the long-term jobless are absorbed. Other public policy problems, he says, take second place. We have an unemployment crisis and only a debt problem, Diamond says.

One way to visualize this issue is to compare U.S. unemployment with job openings since 2001. The result can be seen on the attached chart: a scorpion-shaped curve that tracks the swelling ranks of the long-term jobless. The charts creators were Rand Ghayad, a Ph.D. candidate in economics at Northeastern University, and his adviser, labor economist William Dickens. Their work was part of a report they wrote that was published last year by the Federal Reserve Bank of Boston. It was so striking that the Boston Fed named Ghayad a visiting fellow. Ghayad and Dickens show unemployment only for people out of work more than six months. The chart depicts a conventional pattern until the summer of 2009: Job openings became scarce, and unemployment rose. After that, more jobs began to open up, but long-term unemployment kept rising. The long-term jobless rate has fallen a bit over the past year but is still far higher than it was the last time there were this many openings, from 2003 to 2004. Ghayad sent out fictitious rsums to employers in 50 metro areas to see how they reacted to long spells of unemployment. He found that an applicant out of work more than six months had little to no chance of being called back. The rsums of those out of work for less than six months drew more interest when they showed the applicants had relevant industry experience. At more than six months of no work, having industry experience didnt help at all, Ghayad found. Even if employers do pass over the long-term unemployed, thats not prima facie evidence of illegal discrimination. Employers could arguerightly or wronglythat being out of work signals something is wrong. Its not illegal in most states for companies to factor in an applicants job status when filling a position. It would have been under President Obamas American Jobs Act, which was introduced in 2011 but has been blocked by Republican opposition. The optimistic take is that the bulge is the result of an unusually deep recession and will shrink with time and growth. Picky employers will have to hire the long-term unemployed once the economy fully recovers and the labor market tightens. Thats why MITs Diamond favors more fiscal and monetary stimulus. We could cure our problem in fairly short order if we had an adequate stimulus, agrees Steven Kyle, an economist at Cornell University.

The pessimistic take is that the jobs arent coming back. Andy Stern, former president of the Service Employees International Union, says the long-term unemployed are among the first to suffer from what he predicts will be a more generalized job drought, which will be the result largely of automation. Says Stern, who stepped down from the SEIU in 2010 and is a senior fellow at Columbia Universitys Richman Center for Business, Law & Public Policy: You aint seen nothing yet. The bottom line: Thirty-eight percent of all the jobless in the U.S. have been unemployed for six months or more, according to the Labor Department.
Coy is Bloomberg Businessweek's economics editor.