You’re Hired! Eventually . . .

Friday, July 2, 2010

Unemployment rises in every recession, and the so-called Great Recession has been no exception. The national unemployment rate grew from under 5 percent to just over 10 percent at its peak; a few months ago it was still 9.7 percent and most forecasters were predicting only a gradual further decline this year. Some even predicted an increase. The loss of jobs has been not only deep but durable: many unemployed people have been without a regular job for six months or more.

Men and women who are unemployed for a relatively short time—say, no more than a few months—create relatively few problems for themselves or the economy. They can usually pay for their consumption—housing, food, and other basic expenses—out of their savings, unemployment compensation payments, and loans from family and friends. The long-term unemployed are a major problem. The ranks of those who have been out of work for six months or more increased greatly during the Great Recession, reaching 46 percent of the unemployed by this spring. Their average period of joblessness was about eight months. Only a year earlier, in February 2009, the long-term unemployed constituted only 22 percent of the total, and even that amount was higher than at the beginning of the recession in December 2007.

The long-term unemployed tend to lose confidence in their abilities, their resources to pay for their consumption run out, and their skills begin to depreciate. They may be forced to uproot their families and move to new communities where jobs are more readily available. As a result, their family lives undergo considerable stress that leads to marital problems, frequently divorce. All of these problems explain why special attention has to be given to reducing the rate of long-term unemployment and mitigating its harm.

In most respects, joblessness during the Great Recession is similar to that of all prior recessions, even the great crisis of the 1930s. Despite all the attention given to the growth in the unemployment of highly educated people from the financial sector, joblessness is concentrated among the young, the less educated, and the least skilled. For example, according to the March 10 report of the Bureau of Labor Statistics, seasonally adjusted unemployment rates in February were 16 percent for high school dropouts, 11 percent for high school graduates, and only 8 percent for people with some college or an associate degree. The rate was a quite low 5 percent for those with a bachelor’s degree or higher level of education. Similar disparities were found by age and skill level, with the youngest and least skilled faring worst.

Retraining adults of all ages, but especially older workers, has generally been a failure: it is much too costly relative to the benefits in terms of new jobs.

Although more-educated and older workers are far less likely to become unemployed, once they do lose their jobs they have a much tougher time finding another that pays close to what they had been earning. 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 to high school dropouts in all parts of the country. These workers can find other jobs relatively easily if they become unemployed, even though the new jobs may not last as long and they may have to seek still other jobs. Finding new jobs with comparable pay is much harder for skilled and experienced workers because they are more specialized in their knowledge. They may have to move to another region to get suitable employment.

The proportion of workers who have been unemployed for at least six months tends to rise for a while after a recession, even after the overall unemployment rate starts to fall. This stands to reason: the fact that a person has been unemployed for many months indicates 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 previous 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. It has now registered a slow decline, with a further slow decline likely. Regrettably, the drop may be particularly slow because Congress and the president have created too much uncertainty about 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 of the economy.

Unfortunately, several suggested remedies to cut the rate of long-term unemployment will be ineffective. Many people believe the solution is to retrain the long-term unemployed. However, retraining adults of all ages, but especially older workers, has generally been a failure: it is much too costly relative to the benefits in terms of new jobs.

The only real remedy for the long-term (and other) unemployed is rapid economic growth, as witnessed after the severe recession in 1982, when unemployment peaked in December of that year at 10.8 percent and then fell rather rapidly. There is no magic bullet to accomplish this, but I believe it would be a great help if our leaders in Washington refrained from trying to radically transform parts of the economy while we are recovering, thereby magnifying the high degree of uncertainty typically caused by a serious recession. Instead, they should concentrate on fighting the recession and stimulating long-term economic growth.