Wednesday, July 24, 2013

Legacy of Long-Run Unemployment

The US labor market has been improving from dismal to sluggish, and the overall unemployment rate has been drifting down. But it's worth remembering that after five years of sustained high unemployment, the  unemployed are disproportionately those who face the issues of long-run unemployment in a way that the U.S. economy  has not seen in its post World War II experience.

Here's a snapshot of the unemployment rate over time, generated with the ever-useful FRED website maintained by the Federal Reserve Bank of St. Louis. The sharp rise in unemployment during the Great Recession is striking, but what I want to focus on here is the amount of time that the U.S. economy has been experiencing an unemployment rate above 7.5%. Draw a mental line across the graph at 7.5% and take a look. The unemployment rate was above 7.5% for (almost all of) 26 months from January 1975 to February 1977. It was also above 7.5% for (almost all of) 51 months from May 1980 to August 1984. But since the unemployment rate rose above 7.5% in January 2009, it's now been above that level for 54 months and counting. Also, the graph shows that the spike in unemployment in the early 1980s was "sharper," meaning that unemployment rates weren't at the very highest levels then for as long a time as they have been in the last few years.

 Graph of Civilian Unemployment Rate

One result is that a far higher share of the unemployed have been unemployed for 27 weeks or more than at any time since the end of World War II. In the past, the long-term unemployed typically made up 20-25% of total unemployment during recessions. In the Great Recession, the long-term unemployed were about 45% of the total unemployed, and the share of total unemployment accounted for by the long-run unemployed remains historically high.

Graph of Of Total Unemployed, Percent Unemployed 27 Weeks and over

A similar pattern emerges when looking at the average duration of unemployment. In past decades, this measure usually spiked up to about 15-20 weeks of unemployment in tough times. But in the aftermath of the Great Recession, the average duration of unemployment spiked up to 40 weeks, and even now is at a historically sky-high 35 weeks.

 Graph of Average (Mean) Duration of Unemployment

 A few observations here:

1) As someone on a college campus, where the undergraduates rotate in and out over four years, we have now reached a situation where entire classes of students have entered as freshmen during a terrible labor market and exited as seniors into a terrible labor market. This inevitably has an effect on how they perceive the costs and benefits of college, how their families see it, and how rising high school students see it.

2)  It seems plausible that the long-term unemployed have a harder time getting jobs than those who are more recently unemployed. In part, this may be that the long-term unemployed are less motivated or less attractive as employees--which is part of the reason they are long-term unemployed. After all, unemployed workers lose human capital: that is, they lose a chance for job experience and to keep their skills updated. But in addition, part of the reason is probably that employers make assumptions that the long-term unemployed are less likely to be desireable workers. When the labor market has been so poor for so long, such an assumption by employers is less justifiable than it would have been in the past.

3)  In short, those who are currently unemployed, as a group, are more likely to have experienced long-run unemployment than any previous group in post-World War II U.S. experience. Re-integrating these workers into the labor force is going to bring challenges and costs that I don't think employers, government, or workers themselves have yet thought through.