This is a response to Don Peck’s book excerpt “How chronic joblessness affects us all.”
By Gary Burtless
The opinions expressed are his own.
First, from a labor economics perspective Peck’s analysis is basically correct. In modern capitalist labor markets, long-term unemployment tends to feed on itself via the mechanism that Peck describes. It gets increasingly difficult for the unemployed to get re-employed the longer their unemployment lasts. (There are some hard statistics showing this is true, and that it is true regardless of the state of the economy.) The impact of this phenomenon on the overall unemployment rate became clear in 1980s Western Europe. Countries like France, Germany, Denmark, and Italy that had enjoyed unemployment rates below those in the U.S. for much of the previous three decades found themselves with jobless rates higher than those in the U.S. More worryingly, their unemployment rates stayed above the U.S. rate for a very long time.
It became clear than much of the difference was the gap between the two continents in long-term unemployment (that is, joblessness that lasts longer than 6 months or a year). Europeans who remained in unemployment longer than 6 or 12 months tended to stay unemployed, sometimes up until the age they qualified for an old-age pension. Even when the European job market improved, these unfortunates stayed unemployed. Employers hired from the ranks of already-employed workers (i.e., those who were on other employers’ payrolls) or from new graduates. They tended to shun the long-term unemployed.
Second, it appeared that the European long-term unemployed eventually failed to exert any downward influence on European wages. It was almost as though these unfortunates had become invisible to employers, unions, and governments in the wage-determination process. The availability of millions of willing – but long-term-unemployed – workers did not restrain unions in their wage demands or employers in their willingness to offer higher overall wages. What became clear by the second half of the 1980s was that when European economies started to improve, wage gains also started to rise – in spite of the fact that there were still millions of long-term unemployed workers who would have been happy to fill new job openings at wages below the prevailing wage rate.
Third, one popular theory at the time to explain this kind of hysteresis (i.e., the tendency of high unemployment rates to persist for a long time) was that the skills of long-term unemployed workers atrophied the longer they were without work. Economists said there was “structural unemployment,” by which they meant that the long-term unemployed no longer possessed the skills needed for the industries and occupations that were expanding. My own explanation is a bit different. I believe that when the job-seekers’ queue is very long (as it is when the unemployment rate is 7 percent or higher), employers can be very choosy about who to hire. They can indulge many of their prejudices about which job candidates are most likely to be productive workers and which are most likely to be losers. A candidate who’s been unemployed 6 months, 9 months, or, God help him, 12 months or longer looks like a very bad bet – even if the truth is the opposite.
The following is a guest post by Bruce Yandle, distinguished adjunct professor of economics with the Mercatus Center at George Mason University and dean emeritus of the College of Business & Behavioral Science at Clemson University. The opinions expressed here are his own.
