The Long Shadow of Long-Term Unemployment

By Jeremy Horpedahl, guest columnist

Of all the mediocre and bad news in the June 2012 employment situation report from the Bureau of Labor Statistics, there is one item that deserves serious concern: the fact that long-term unemployment continues to plague the labor market.

The average duration of unemployment is stuck at about 40 weeks, where it has been for about a year. Even in the worst recessions of the past six decades, this figure has rarely exceeded 20 weeks. The median number of unemployed weeks stands at about 20 weeks, down from 22 weeks a year ago and 25 weeks two years ago, which is promising. But this means that a smaller and smaller segment of the labor force is suffering longer and longer periods of unemployment.

Holding Back Recovery

The long-term unemployed are the real black spot on the slow economic recovery — not discouraged workers, which have declined by about one-third the past two years; not the declining labor-force participation rate, which is mostly a demographic feature of retiring baby boomers.

The real trouble with the labor market is that, since the end of the recession three years ago in June 2009, the number of workers unemployed for over half the year (26 weeks) has increased by about 1 million (from 4.4 to 5.4 million). Over this same time period the number of unemployed workers overall has declined by over 1.9 million, and the unemployment rate fell from 9.5% to 8.2%. As a result 42% of the unemployed have been out of work for at least six months. If the overall recovery is stuck in second gear, the long-term unemployed are going in reverse.

A Sign of Hope

But there is some hope for the long-term unemployed. First, while their fraction of the total unemployed has been stubbornly constant lately, their absolute number has declined fairly dramatically since early 2010, by about 1.4 million since the peak in April 2010. Second, extended federal unemployment benefits look like they will finally be ending for newly unemployed workers this month, and for all workers by the end of the year (absent any further legislation). Yes, that is a sign of hope, not a cause for concern.

Nearly all studies of unemployment insurance find that increasing the duration of potential unemployment benefits increases the length of time individuals are unemployed. The debate is only over the magnitude during past extensions of benefits. And while the magnitude is also unknown for the current round of extended benefits (which could have lasted up to 99 weeks for some), there is no reason to believe that basic human nature has changed since past recessions. People still respond to incentives.

It's Time to Cut Extended Benefits

The extension of unemployment benefits during the recession — when GDP was falling — may have been justified to increase consumer spending and provide temporary support to unemployed workers. But now that GDP is rising — and has been for three full years — the logic is completely reversed. Continuing to offer generous unemployment benefits for long periods of time will prolong the ills in the labor market. It will be a drain on long-term growth as well, as resources sit idle and the spending on unemployment benefits contributes to persistent fiscal problems at all levels of government.

While ending extended unemployment benefits will certainly cause very short-term pain for some individuals and families, this is one policy change that should be carried out immediately before any additional monetary or fiscal stimulus are applied.

Jeremy Horpedahl is an Assistant Professor of Economics in the Harold Walter Siebens School of Business, Buena Vista University. He received his Ph.D. from George Mason University. Prior to entering academia, he was a Senior Economic Analyst for the South Dakota Department of Labor.