Education

Extreme long-term unemployment in the US is at 'unprecendented' levels. It could pose a risk to future growth

Unemployed Belgian Mohamed Sammar (R) answers questions during a simulated job interview, which is recorded to help him get feedback afterwards in Brussels July 2, 2013. Sammar, 27, has been looking for a job in the construction sector for 2 years. "Fit for a job" is the initiative of former Belgian boxing champion Bea Diallo, whose goal was to restore the confidence of unemployed people and help them find a job through their participation in sports.

Levels of unemployment are still exceptionally high by historical standards. Image: REUTERS/Francois Lenoir

Nick Buffie
Research Assistant, CEPR
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This month, the Bureau of Labor Statistics released the August jobs report. The new numbers were mostly positive, with employers reporting net job growth of 151,000 for the month.

However, one disturbing aspect of the report should be the relatively high rate of long-term unemployment. While the percentage of jobless workers unemployed 27 weeks and longer has been trending downward in recent years, it is still exceptionally high by historical standards.

Even more disturbing is the relatively high rate of “extreme” long-term unemployment, the condition of being unemployed one year or longer. The figure below shows extreme long-term unemployment as a percentage of total unemployment from May 1977 to present. Currently there are over 1.3 million Americans who have been out of work for over a year.

 Extreme Long-Term Unemployment, 1977 to Present
Image: CEPR

Today’s extreme long-term unemployment rate is historically unprecedented. Before the most recent recession, extreme long-term unemployment had never broken 14.0 percent; the median rate between 1977 and 2001 was 7.7 percent, and at times it even fell below 4.0 percent. However, at its peak in 2011, extreme long-term unemployment got as high as 31.4 percent. Right now approximately 17.5 percent of the unemployed have been out of work over a year, including 15.5 percent of unemployed women and 19.2 percent of unemployed men. (Furthermore, this rate may actually be biased downward if many of the long-term unemployed gave up searching for work. This is more likely now than in prior decades since eligibility for benefits has been narrowed in many states.)

This is important for two reasons. First, it tells us that unemployed workers today are suffering far more than they did in the past. If spells of unemployment are short and don’t substantially decrease a worker’s standard of living, unemployment may not actually inflict much harm on those who experience it; but if spells of unemployment are long and are associated with substantial drops in income, they can be devastating for the unemployed. In both 2006 and 2007, the average duration of unemployment was 17.9 weeks; as of last month, the average unemployment spell was more than 50 percent longer at 27.6 weeks. And because most of the long-term unemployed are no longer eligible for unemployment insurance, they have to get by without any public support.

Second, today’s long-term unemployment may pose a risk to future economic growth. Labor market economists worry about a phenomenon known as“hysteresis” in which long stints of unemployment permanently decrease a worker’s chances of getting hired. There is evidence that this is going on right now, with the long-term unemployed facing clear discrimination in the job market. Employers are less likely to call back applicants who have been out of work six months or longer; and some job postings explicitly tell the long-term unemployed to not bother applying.A Harris poll conducted in May 2016 found that about half of unemployed workers had not been interviewed for a job since 2014 or earlier; not surprisingly, the unemployed cited “being out of work too long” as their primary barrier to landing a new job.

This strengthens the case for greater monetary and fiscal stimulus. For the unemployed, it’s always important to get jobs — but today it’s even more important, both for their sake and for ours.

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