"No End in Sight" to Unemployment

James Surowiecki at The New Yorker:

The talk in Washington these days is all about budget deficits, tax rates, and the “fiscal crisis” that supposedly looms in our near future. But this chatter has eclipsed a much more pressing crisis here and now: almost thirteen million Americans are still unemployed. Though the job market has shown some signs of life in recent months, the latest figures on new jobs and on unemployment-insurance claims have been decidedly unimpressive. We are stuck with an unemployment rate three points higher than the postwar average, and the percentage of working adult Americans is as low as it’s been in almost thirty years. What’s most troubling is that so much of this unemployment is long-term. Forty per cent of the unemployed have been without a job for six months or more—a much higher rate than in any recession since the Second World War—and the average length of unemployment is about forty weeks, a number that has changed very little since 2010. The economic recovery has now lasted nearly three years, but for millions of Americans it hasn’t yet begun. 

Being unemployed is even more disastrous for individuals than you’d expect. Aside from the obvious harm—poverty, difficulty paying off debts—it seems to directly affect people’s health, particularly that of older workers. A study by the economists Till von Wachter and Daniel Sullivan found that among experienced male workers who lost their jobs during the 1981-82 recession mortality rates soared in the year after the layoffs. And the effects of unemployment linger. Many studies have shown that the lifetime earnings of workers who become unemployed during a recession are permanently reduced, and von Wachter and Sullivan found that mortality rates among laid-off workers were much higher than average even twenty years afterward.


Unemployment doesn’t hurt just the unemployed, though. It’s bad for all of us. Jobless workers, having no income, aren’t paying taxes, which adds to the budget deficit. More important, when a substantial portion of the workforce is sitting on its hands, the economy is going to grow more slowly than it could. After all, people doing something to create value, rather than nothing, is the fundamental driver of growth in any economy...

The phenomenon in which a sizable chunk of the workforce gets stuck in place, and in effect becomes permanently unemployed, is known by economists as hysteresis in the job market. This is, arguably, what happened to many European countries in the nineteen-eighties—policymakers did little when joblessness soared, and their economies got stuck, leaving them with seemingly permanent unemployment rates of eight or nine per cent. The good news is that there’s not much evidence that hysteresis has set in here yet. The bad news is that we can ride our luck only for so long. If the ranks of America’s long-term jobless don’t start shrinking soon, it’s less likely that they ever will, and we’ll be looking at a new “natural” unemployment rate for the U.S. economy...

You’d think that Congress and the Federal Reserve would be straining every sinew to avoid such a fate. It isn’t as if they’re out of tools. A more aggressive monetary or fiscal policy, or both, would help put lots of Americans back to work. We could also follow Germany’s example and subsidize job-sharing programs, which have helped Germany bring down its long-term unemployment rate despite the recession. Sadly, there’s little sign that policymakers have much interest in using these tools. The inertia can be chalked up, in part, to ideological hostility from those who are opposed to more government spending or to anything that might increase inflation. But the bigger obstacle may be psychological: the longer unemployment stays high, the likelier people are to get used to it. Five years ago, an unemployment rate of seven and a half per cent would have seemed outrageous, but it’s possible that five years from now it will seem not so bad. A long-term crisis, after a certain point, no longer seems like a crisis. It seems like the way things are.