Opinion

Felix Salmon

The tragedy of long term unemployment

By Felix Salmon
April 23, 2013

Paul Krugman and Megan McArdle both point to this chart today:

What you’re looking at here is the plight of the long term unemployed in the wake of the Great Recession. If you look at the economy before the recession (the blue line), it works pretty much as you think it would: as the number of job openings goes up, the long term unemployment rate goes down. But then the crisis happened, and now we’re in a Bizarro world where the long term unemployment rate goes up even as the number of job openings increases.

It’s worth looking at this chart in the context of one which might be more familiar:

What you’re looking at here is initial claims for unemployment (the blue line) and the unemployment rate (the red line); both are rebased to 100 at the end of 2007. You can see that initial claims have historically been a very good leading indicator when it comes to the unemployment rate. And that’s perfectly intuitive: if the number of people newly claiming unemployment each week is going down, you’d expect the overall unemployment rate to follow.

But there’s something worrying about this chart: although the unemployment rate is indeed coming down, it’s not coming down as fast as you’d expect it to, given the sharp drop in initial unemployment claims. In other words, people aren’t becoming newly unemployed, but the unemployment rate is still staying stubbornly high. Which is another way of saying that this time around, the long-term unemployed are finding it particularly difficult to get back to work.

I decided to put together the exact same chart, only instead of using the overall unemployment rate, I’d look at just the long-term unemployment rate — the proportion of people who have been unemployed for more than 27 weeks. This is what I found:

The blue line, in this chart, is exactly the same as the blue line in the chart above it. But the red line is long term unemployment — which is at massively unprecedented levels.

This chart tells me two things. Firstly, it is indeed the long-term unemployed who are the reason why the unemployment rate overall isn’t coming down as fast as it should be. And more importantly, there’s a quiet humanitarian disaster happening right under our noses. Here’s McArdle:

Short of death or a debilitating terminal disease, long-term unemployment is about the worst thing that can happen to you in the modern world.  It’s economically awful, socially terrible, and a horrifying blow to your self-esteem and happiness.  It cuts you off from the mass of your peers and puts stress on your family, making it likely that further awful things, like divorce or suicide, will be in your near future.

McArdle and Krugman differ on the policies that should be enacted to address this emergency — but they agree that policies should be enacted to address this emergency, with urgency. That’s where they both part ways with Congress, which is much more interested in deficit reduction than it is in trying to make a dent in the long term unemployment rate.

The lesson of the past few years is that this is not a normal recovery: corporate profits are doing great, while total employment remains anemic. We can’t trust the invisible hand to generate the millions of jobs that are needed, especially with regards to the long-term unemployed. With gridlock in Washington, the result is a huge amount of unnecessary human misery.

Comments
19 comments so far | RSS Comments RSS

Well, here I go again. A good way to reduce long term unemployment is to give employers little choice but to increase employment. It doesn’t have to be mandated via legislation, but the tax code can be modified such that either businesses spend more money, either by increasing their payroll or by just buying more things (which forces other companies to hire more people), or they pay more in taxes, and the government hires more people or buys more things.

The profits can’t just sit there, they have to be used.

Posted by KenG_CA | Report as abusive
 

Great study recently done, those out of work longer than 6 months will find it incredibly hard to even get an interview much less a job – http://dish.andrewsullivan.com/2013/04/1 6/the-unemployment-cliff/

Posted by Harpstein | Report as abusive
 

The problem for the long-term unemployed younger workers with better skill sets are continuing to enter the workforce. It’s not like just because the economy has been in the tank, people have stopped graduating from college.

And irony of ironies, corporate profits are doing great during a recession…probably because they are generating significant profits by laying off people.

How about a policy that requires corporations to pay a “layoff tax” anytime they lay somebody off when the unemployment rate is above 6%…

Posted by mfw13 | Report as abusive
 

So, after looking at unemployment indices of the last 40 years (40 years!) it’s your considered view that current rates are at “massively unprecedented levels.” Hmm.

Bernanke told the poor kids at GWU that Andrew Mellon was “heartless,” thereby setting up non-Mellonites like himself, you, Krugman, McArdle, & too many others to list as (self-proclaimed) good-guys, the heart-ful.

But is opposing austerity all it takes to be on the side of the angels? If so, it’s no wonder there are so many.

Richard Rorty once said: ‘Everyone agrees the baby’s life should be saved; the argument is about how to pay for it.’

Posted by dedalus | Report as abusive
 

@KenG_CA I know you and I have been around this block before but how can you force employers to hire?

Lets say you raise the corporate tax rate to 75% and offer some kind of income tax credit for payroll taxes paid. That would be a massive incentive to hire more workers but what would they do?

Do you think that companies have dozens of positive net present value projects all set to go but they are just choosing not to do them because they would need to hire a few more people?

I guess you could have some long-term unemployed people do the yard-work for and pick-up the dry-cleaning of higher value presently employed workers… but would that really accomplish the goals your plan aspires to?

I’d rather see the government hire people directly at minimum wage to do 20 hours of the bureaucratic work and then pay them another 20 hours per week to take classes at community colleges to build their skills up to become LPN’s, Auto-techs, welders, drivers, CNC lathe operators, and the 50 other jobs which always seem to be in demand.

Regardless of what developed 1st world governments do the bottom 10% of workers are going to struggle to compete with younger, smarter, cheaper, more driven emerging market workers who can build things overseas or do telecommute style work. The bottom 10% will be even more stressed as we rush to boost immigration. The new workers will be thrilled to jump most of the long-term unemployed in the line to find new work.

Posted by y2kurtus | Report as abusive
 

Dirty secret of the 21stC: There aren’t enough jobs for all the 7B people on Earth.

Posted by crocodilechuck | Report as abusive
 

y2k, the companies will pick higher risk projects to fund, because higher risk projects still have a better chance of generating a return than taxes. They may not have dozens of positive net present value (adjusted for risk) projects, but they probably have dozens that would be better uses than paying more taxes.

One thing I left out of this rant was my usual call to allow companies to deduct the cost of dividends from taxable earnings. If they had absolutely no place to invest the money, they could distribute profits, without double taxation, to shareholders, who would then be faced with the same dilemma: invest or pay taxes.

So take Apple, with their gigantic cash hoard. If they didn’t want to do something monumental like buy (or build) a wireless carrier or buy the remains of Fisker and try to do for cars what they have done for phones, tablets, and media distribution, they could pay a big dividend. They could easily distribute $40 billion without impacting their future, and if they could deduct that from their taxable income, they would have little reason not to (I would also suggest allowing US companies to repatriate profits, without taxation, if they are distributed as dividends or re-invested in capital spending, R&D, education, or health care). Or even GE or IBM – raise their tax rate, and force them to up their investments or dividends, but both puts more money in circulation. Maybe financial firms, with their windfall profits, would just pay people more money, but then they would spend more of it, and also pay more in taxes.

Some of the money would no doubt flow to low or no-skill tasks, but that wouldn’t matter much. The goal is to not let money sit on the sidelines while everyone waits for the economy to grow again. It won’t grow again, if the money is taken out of circulation. If the money is forced to flow, it means it’s not being accumulated in narrow silos, but rather it’s filling up lots of holes, many of which are dependent on government relief. If the money is allowed to rest, it does no work (please nobody tell me how money deposited in banks gets loaned out, because it’s just not happening), and should be taxed.

Idle cash = idle people.

Posted by KenG_CA | Report as abusive
 

The tragedy of a central government sucking at its job.

Posted by bryanX | Report as abusive
 

We all work with people who are not really up to the task. I have one colleagues who suffers from migraine headaches. She is basically addicted to pain killers and works about 3 days a week. Another says he has panic attacks that keep him from getting to work every day. Another part timer with full time salary and benefits. I have no doubt that, at some point, both will end up unemployed and unemployable. There is little the government can do to fix them. All this analysis skips over what we all know as fact: not everyone is cut out to work in these competitive and stressful corporate cultures.

Posted by silliness | Report as abusive
 

While mfw13 illustrates clearly part of the problem is one of public perception, that there still IS a recession (there hasn’t been for some years mate!), dedalus illustrates the other mistaken view held by so many (particularly on the far right) based to a large degree it seems on Rogoff’s now discredited calculations that austerity is the way to get people to spend money (in effect, get growth back).

People need to take a step back – you can’t understand a forest by studying the bark of a single tree, no matter how many microscopes you bring to bear.

As for the unspent corporate profits, it is too easy for them to hide them overseas in tax havens. Instead of using this money for the sake of the business, as ‘silliness’ reports, their reaction is to demand more and more and more from their employees.

I know of people in multinationals who are under so much stress they work days off and cancel holidays to complete tasks where management have ceased to manage effectively because they are so busy looking after their own self-interest and not those of the company due to the stress they are under.

This results in them overspending on expense accounts, visiting the most expensive restaurants, ordering the best wines, cigars and other extras, staying on for extra days when on business trips so as to get a free ‘holiday’, always travelling business class and so on. In one location I know of, they are building a new open plan building to replace office units; cue – more stress, more bad behaviour from employees, less caring about the company. It’s called capitalism but in reality it’s collectivism. Short term share price gains perhaps, but long term, the company is slowly disintegrating.

Posted by FifthDecade | Report as abusive
 

Felix, you ought to know all of this, being a Brit and all. This is the focus of the work of Richard Layard who I’m sure you at least know of.

My annoyance here is the way in which everyone’s gasping as if this is some new and unknown occurence. When it’s been an absolutely standard part of the analysis of the European labour markets for decades.

Posted by TimWorstall | Report as abusive
 

There is a concept in Keynes I am sure you are familiar with. It is called “sticky wages”.

What happened in 2007 is that the economy finally shook out all the people whose skills have been made obsolete by the IT revolution. Some significant portion of those people have been unwilling to re-skill and/or reduce their labor demands to those of someone with no skill.

If you don’t have an extremely specialized knowledge or skill-set the relative to the value of your labor over just random college graduate who is good with a computer and has no other special skills has tanked.

You have tons of unemployed former directors and managers and machinists who used to be able to demand very good wages for skills that are no longer valuable. No that the economy has finally caught up to the reality of the labor situation they are having trouble adjusting.

Posted by QCIC | Report as abusive
 

Felix, I would be interested in seeing the long term unemployment numbers charted with the construction industry, housing starts, commercial building starts.

Many of your readers are blaming the long term unemployed for lack of skills, which seems petty. Housing starts has traditionally been THE leading indicator for the state of the economy, and these days, it is less talked about. (Perhaps, because it has not recovered to any significant extent). Construction covers a large swath of laborers, from engineers and architects, (very highly skilled), to truckers, miners, lumberjacks and obviously construction workers. Few of these skill sets should need to be “retrained”. They have very valuable skills. I am guessing that a sluggish construction economy accounts for most of the long term unemployed.

Posted by bittersweetone | Report as abusive
 

Gee, when something is so bad that Megan “Math is Hard” McArdle gets the analysis right, it’s REALLY bad.

Posted by Matthew_Saroff | Report as abusive
 

It really isn’t a viable solution to devise things to punish companies for not hiring people. One thing alone determines hiring: demand for products. If you increase demand in general in the economy, the hiring comes along a natural effect. And often when the public is not flush enough to create more demand, you use government to create demand. Public works, subsidies to states to pay salaries of laid off public workers, etc., etc.

Posted by Chris08 | Report as abusive
 

Attempting to force corporations to hire is not likely to be particularly successful, based on the limited success that bribing companies in hiring has had. Worse, “efficiency gains” generally means that every year profits increase faster than employment costs (both total workforce and salaries), which is a dynamic that isn’t changing in the near future (if ever).

Krugman’s solution – restore government hiring (cops, teachers, file clerks and bureaucrats) – is at least efficient and effective (in that a lot of people can be hired fairly quickly). Unfortunately, the backers of deficit hysteria are fundamentally anti-labor, which means that they and their Congressional toadies are unwilling to countenance any pro-worker initiatives.

One potential solution is to attempt to cast renewed government hiring as a “family” issue in order to appeal to some less-radical social conservative. The tradeoff is likely to be the gutting of government worker protections (especially collective bargaining). Considering the success that state and local Republicans have had in that project already, a controlled descent with some immediate payoff may not be a terrible outcome.

THe alternative is a “free market” solution: step over the bodies and outsource the cleanup.

Posted by WallStLib | Report as abusive
 

It appears after several years of little of no improvement in the situation, that long-term unemployment is a predicament that’s up to a few progressive politicians, the long-term unemployed themselves, and their advocates to work towards a creative remedy for. Sadly, at least as things stand today, most of “employed America” is far too focused on other things to really be inclined push for solutions–let alone hold an interest in the problem.

What would be the incentive for it to do so? Raising public awareness about long-term unemployment and its ramifications is very important to addressing it, but there’s an unfortunate risk that the attention of employed America will eventually “wear out” to ongoing discussion of it. After all, long-term unemployment as a topic of discussion is a “real downer.” But it’s important for us all to remember that it’s theoretically possible for almost any non self-employed worker in today’s economy to wind up unemployed for six months or longer at some point in their life.

The United States is one country, and whether we realize it or not–as oligarchs, employed workers, or unemployed job seekers–we’ll all have to live indirectly or directly with the consequences of inaction on reducing long-term unemployment. An obsession with implementing race-to-the bottom austerity policies prevails in today’s Washington and any concerted effort by the public sector or private employers to aggressively lower unemployment appears very unlikely to happen.

In the end, the inaccurate, prevailing thinking about the low potential workplace contribution of long-term unemployed will have to change. Closely-held stereotypes of the long-term unemployed as risky potential hires will need to be challenged, and widespread bias against workers attempting desperately to re-enter the workforce and fix their lives need to be fought at every turn and eventually defeated.

Posted by URising | Report as abusive
 

To some extent it has to be considered the individual unemployed person at fault. There are actually many jobs out there. Sure, many are very low pay and many are doing things that are difficult and not fun. For some of us however, being unemployed is more unacceptable than having a crappy low paying job. Better jobs too, can be had with real education. Some of us in fact educate ourselves constantly throughout life because knowledge makes everything easier. Some have never learned that.

Posted by brotherkenny4 | Report as abusive
 

At least the construction industry was mentioned in your discussion. For California, the recession fights on. In construction you would think that 35 years in business matters but alas, the bottom line is price over quality. No matter if they can barelyy speak english or wether they have a license or not. The bottom line is price. The license board is so busy budting non licensed illegals, they can’t keep up.

Posted by judyjs | Report as abusive
 

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