The Becker-Posner Blog

MOOCs—Implications for Higher Education—Posner

“MOOCs,” an acronym for “massive open online courses,” denotes an important, possibly a revolutionary, development ineducation. These courses are online, free of charge, open to anyone in the world who has a laptop and an Internet connection, and offered by entities with strange names such as coursera, codeacademy, edX, khanacademy, and udacity. The offerors are mainly university consortia or university-affiliated. Moreover, and critically, the universities are elite universities like Stanford, Berkeley, Harvard, and Columbia.

Not that online education is new; there are adult-education online courses such as are sold by The Teaching Company; there are even online college degree programs, offered mainly by for-profit colleges. What is new is the scale and potential of free online education offered by, or in conjunction with, the nation’s leading universities.

The courses, like conventional college courses, are sequenced by difficulty, enabling the student to progress from beginner to advanced. The courses cover not only a very broad range of technical subjects such as math, statistics, computer science, the natural sciences, and engineering, but, increasingly, also courses in the social sciences and the humanities. MOOCs ae not offered for credit; they do not count toward an undergraduate or graduate degree; they are (at present) for people who want to obtain not a credential but skills or knowledge, whether for enjoyment or to put to some practical use. Anyone anywhere in the world can enroll; individual MOOC courses are attracting tens of thousands of students. There are frequent quizzes embedded in each online courses, and sometimes there are mid-course or end-of-course exams as well. These exams are graded by peer groups (other students enrolled in the course—in one program a student’s exam is graded by five other students and the grade on the exam is the average of the grades given by the five graders). Some students form online study groups, or in-person groups with students who live nearby.

The format seems superior to the conventional lecture. The average quality of the lecturers is much higher, because there is no limit on the number of students “attending” the lectures and so no reason why any student should be stuck with a mediocre lecturer. The online format has other advantages. The student can scroll back, or fast forward—in short can go at his own speed, which he could not do in a live lecture. A first-rate lecturer can communicate more effectively than a textbook (and of course the student can supplement the lecture with a textbook), and, of great importance, one doesn’t have to travel anywhere to attend an online lecture. One can obtain in effect a first-class American college education wherever one lives and however little money one has. All you need is a laptop computer and an Internet connection. There is a problem of asking questions of the lecturer in a class of ten thousand students, but some MOOCs solve it by allowing students to post questions that the student body votes on, and only the most popular questions are put to the lecturer.

MOOCs are a very recent development; most of them are fewer than two years old. Only in the last month have they been receiving significant media coverage (there was, for example, an excellent article on them by Tamar Lewin in the November 20 New York Times). Maybe they will flame out. But I don’t think so; as I said, they have revolutionary potential.

It may help to see this by thinking of MOOCs in demand and supply terms. There are three types of demanders for such a product. One consists of retirees and others seeking mental stimulation. Another and larger type (in part because it is more international) consists of persons, mainly young but also some middle aged, seeking to acquire skills that will contribute to their careers. And the third, which at the moment is potential rather than actual, is degree seekers. It is merely potential because the MOOCs don’t offer college, graduate, or professional degrees. They can’t, without a more rigorous method of evaluating performance. Apart from the limitations of student grading, there is the problem of plagiarism in the Age of Google when an exam is taken at home. (There is no problem of plagiarism when an online course is not offered for credit.) Even if these problems could be overcome, there would be the problem of basing evaluation of a student’s performance entirely on lecture courses—no small courses, no personal interaction with faculty, no seminar papers or senior theses.
There would also be a problem arising from the heterogeneity of an international student body admitted to the online college without selectivity and therefore with great variance in levels of preparation. The mediocre performance of a student from a backward country might signal far more intellectual promise than the superior performance of an upper middle class student from an advanced country.

On the supply side of the MOOC market, there is the problem of developing a viable business model. As long as the market for MOOCs is limited to the first two groups of demanders—persons seeking intellectual enrichment and persons seeking marketable skills—the costs of providing the product are very low. They primarily consist of modest bonuses for the lecturers—modest because most lecturers would consider a huge expansion in their audience to be a substantial bonus in itself, as well as auguring a likely very large market for their textbooks, though the overall market for textbooks will decrease as MOOCs catch on. On the benefits side, even without sale of advertising space or the charging of an enrollment fee, MOOCs provide cheap advertising for the colleges and universities that provide the lecturers.

The question of supply and hence of the optimal business model becomes acute only if providers of MOOCs decide to award degrees and thus tap into the vast market for college, graduate, and professional education. Now enrollment would have to be limited (it would be limited automatically once an admission fee to the program was charged) and now higher costs would be incurred: admissions personnel would have to be hired to decide who would be admitted, financial personnel would have to be hired to collect fees and administer student loans and scholarships, graders would have to hired and online exams monitored, provision for seminars and thesis supervision would have to be arranged—in short many of the expenses of a conventional college or university would have to be incurred. But the expenses would be much lower per student because there would be so many more students, and so fee revenues could be huge even if the fee for enrolling were very modest. For example, costs of room and board would be very low because students would live and work at home.

Harvard has about 6600 undergraduates. One can easily imagine an online Harvard enrolling 66,000 undergraduates with no diminution in the average quality of the students. Or 660,000, for that matter, because it would be drawing from the entire world. But then what happens to the physical Harvard, in Cambridge, Massachusetts, and its resident students? If it remains, there will be a lingering suspicion, and quite possibly the reality, that a degree from physical Harvard is a more valuable credential than a degree from online Harvard—but also there will be elite students who will decide that the cost and possibly quality advantages of online Harvard (quality advantages because only the very best Harvard teachers will be invited to lecture online) outweigh what initially at least would be the greater prestige of a degree from physical Harvard.

A movement toward online higher education could have an enormous impact on American higher education, comparable to the impact the Internet has had on bookstores and publishers. There would undoubtedly be a very rapid and considerable consolidation of colleges and universities. Would quality fall? I imagine it would increase. A harder question is whether the movement toward online higher education would be stymied by the desire of students for conventional extracurricular activities such as sports and the excitement of living away from home, with other young people. No doubt many American, though few foreign, students would feel that way (college students in most foreign countries live at home rather than on a college campus). But offsetting such a preference would be much lower tuition and living costs and access to a better college, since there would be no physical limits on the size of a college. There are many more than 6600 high school graduates who meet Harvard’s admission standards; all who do could be admitted to online Harvard at no cost to Harvard.

Online Courses and the Future of Higher Education-Becker

Online courses began around 1990 with the growth of more widespread access to the Internet. They spread rapidly in the United States during the last half of the 1990’s buoyed by the dot-com boom, and fell sharply after that bubble burst. During this early period, online courses typically charged fees. Some of the courses catered to individuals who wanted to improve their job prospects, others were meant solely for intellectual enjoyment, while some could be used to obtain college degrees. For-profit schools with physical facilities, such as DeVry University and the University of Phoenix, were often sponsors of online courses, although a few of these courses were sponsored by nonprofit universities.

What is new about the MOOCs (which stands for “massive open online courses”) is not the use of the Internet to instruct in particular subjects, but that they are free, and they often are sponsored by some of the very best universities, such as MIT, Harvard, and Stanford. Since they cost little if anything to take, it is much easier for the MOOCs to get massive enrollments than the fee-charging courses offered during the earlier boom in online courses. Various recent articles on MOOCs in the New York Times by Tamar Lewin show that the massiveness of the enrollments is somewhat misleading since, as one would expect with free courses, the great majority of those initially enrolled fail to finish. Still, the number of persons who do finish these courses is very large compared even to what are considered very big enrollments in on-site courses.

Aside from typically being free, the other unique aspect of MOOCs is that many of them are sponsored by known, often well-known, private and public universities. Since so far these universities get no revenue from the MOOCs they offer, the motivation is teaching to much larger audiences, favorable publicity for the universities involved, and the prospect of eventually earning revenue from these courses by charging fees or in other ways. The cost of offering these courses is typically not large since even the super star professors who sometimes lecture in online courses are quite cheap, and they may even do it without receiving any payment since they too want to spread knowledge and their influence.

Particularly given my long time interest in human capital, I have been excited by the prospects of online education since the 1990s. Indeed, I was a little involved at that time in helping to develop a for-profit company that offered fee-charging courses to men and women who wanted to improve their skills so that they could get better employment opportunities. Online courses have many advantages: they can enroll large numbers of students from many countries and of various ages, individuals can take them at their convenience from their homes and when they have free time, online students can easily communicate with each other even when they are located in different countries, and enrollees can get quick feedback from their answers to quizzes and other questions posed by instructors.

The equally obvious downside of online courses is that they do not involve direct personal contact with online instructors and classmates. No one yet really knows how important such direct contact is to the learning process. It likely varies from student to student, and depends also on the materials covered, and how the instructor conveys what he or she knows. I do not expect online course programs to compete effectively in the next decade against the education offered by top universities, although that may be because I do not appreciate fully how comfortable young people are with online communication. Still, I do expect online instruction to become very good substitutes for the thousands of courses offered by lesser schools.

Since online courses are so convenient and will remain relatively cheap, I expect them to spread rather rapidly sometimes even when they are decidedly inferior to courses that allow personal contact with instructors and fellow students. Online courses are likely to be particularly popular in developing countries because the worldwide boom in higher education during the past several decades has meant that many developing countries are trying to rapidly boost enrollments in higher education. A good example of what might happen in higher education in these countries is provided by the installation of cell phone towers in many poorer parts of the world, such as rural India and most parts of Africa. Poor families in these areas are now able to use cell phones to communicate with the outside world without their governments or private companies having to lay expensive phone cables for wired phone service.

Similarly, building physical facilities to accommodate very large numbers of new enrollees in higher education would be quite expensive for developing countries. When access to the Internet becomes widely available in developing countries-it already is in China- online courses that qualify for credits toward a college degree would be a substitute for physical facilities. These degrees typically would not be of the quality offered say by Peking University in China or the IITs in India, but a system of higher education should have a diverse mixture of schools with different approaches to teaching and offering various qualities of education.

 In summary, I expect online education to be a rapidly growing part of the higher education landscape, especially in developing countries that want to expand quickly higher education opportunities.

 

Why People Vote and What That Implies-Becker

The number of voters in the recent US presidential election was down by about 5 million voters from 2008, yet still about 120 million Americans voted this month. President Obama had one of the smallest winning percentages in the popular vote of incumbent presidents, but he still won by over 3 million voters.

This raises the very old question of why people vote in large elections when their chances of being a pivotal voter are virtually zero, and when voting takes time and is often inconvenient. The electorate is surely conscious of the cost to them of voting since, for example, turnout is usually much smaller when the weather is very bad. The common answer nowadays about this so-called paradox of voting is not that voters are irrational, but rather that they vote for reasons other than to influence outcomes. They may vote to indicate their moral support for particular candidates, or because they believe they express a precious right when they vote, or for other non-instrumental reasons.

These explanations do not say a lot without further analysis, but they do give possible directions for trying to understand the fundamental question of why and how people vote. Jorg Spenkuch, a graduate student at the University of Chicago, using data for German elections provides some answers. He shows that about 1/3 of the voters who prefer small parties, such as the Greens, acted “pivotally”, and voted instead for parties that had much better chances of winning certain elections. If voters mainly want to express moral support for their favorite candidates, why do so many supporters of small parties that are very unlikely to win often vote for candidates of one of the big parties because they do not want to “throw away” their votes?

Since the great majority of voters presumably do not expect to influence election outcomes, who they support is influenced disproportionately by campaign rhetoric, debates among candidates that have little intellectual content, and by other methods of persuasion that are not very informative about the candidates. I like to say that consumers put more time and effort into deciding which cereal to buy and into other small consumer choices than in gathering information on economic and other issues about presidential candidates.

But I am not claiming that voters are less “rational” than consumers of everyday products. Individuals pay more attention to what they buy than whom they vote for because what they buy has a direct and tangible effect on their wellbeing. Since the incentives to become well informed are radically different,  “rational” voting implies very different kinds of behavior than does rational choice of cereals or peanut butter.

Given the little effort that voters put into determining policy positions of different candidates, this improves the chances of candidates who are charismatic, look honest and caring, and project images that they have attractive visions of what they want to do even when they really have no well thought out beliefs about how to proceed if they get elected. This analysis, and the greater competition usually present in the private sector than in the political arena, imply that campaign rhetoric and campaign advertising will generally be less informative and less honest than is the typical private advertising. Of course, voters also value debates and campaign advertisements for the entertainment they provide (this is true of some advertising of goods as well).

Votes are more likely to matter in local contested elections, so one would expect voters to be better informed on local issues and local candidates than on more national issues and ational candidates. This is one reason why decentralized government is more likely to be responsive to the wishes of the electorate than is centralized government.

Of course, I agree that contested elections, the foundation of a democratic society, are far better than a system where there are no elections and a single Party decides who holds various government positions. Even weak competition among parties for political office with voters who are not well informed is usually far better than no competition at all. Winston Churchill famously said many years ago, “It has been said that democracy is the worst form of government except all those other forms that have been tried”. This conclusion may not be quite as true in the modern Web world as it was in Churchill’s time, but it still contains a fundamental truth.

Nevertheless, in determining which decisions should be made by the political process in a democracy, it is important to remember that individuals have little incentive to be well informed on political issues. As a result, their votes may not effectively reflect their interests or much knowledge of the issues.

 

The Paradox of Voting--Posner

The paradox of voting in national elections is that, since a single vote is almost certain to have no effect on the outcome (in a Presidential election, it will merely add one digit to an eight-figure number), there seems to be no benefit from voting. The cost is small enough (if it’s high for a person, he is unlikely to vote), but it’s positive, so that if the benefit of voting is zero the voter is being irrational. Yet, as Becker points out, more than 100 million people bothered to vote in the recent Presidential election. 

Some people vote because the political campaigns make it costly for them not to vote—one technique in “get out the vote” drives is pestering people to vote so that they will feel uncomfortable not voting. Some vote because they think that it will encourage others to do so. Some vote because they consider it a civic duty. Some voting is purely expressive—a way of expressing strong feelings pro or con a candidate (or pro one and con his opponent); certainly anger played a role in votes against Romney by members of groups that he or his party seemed to disrespect, and anger at Obama played a role in the large number of votes that Romney received. In this respect voting is like booing or cheering at an athletic event or other entertainment. One person’s applause at a concert is inaudible to the performers, yet people applaud, and not mainly I think because others in the audience would look askance at them if they did not. And finally people interested in politics like to vote to convince themselves and others that their interest is serious—they are willing to put their money (not money exactly, but the cost in time and bother of voting) where their mouth is. 

No one thinks that applauding is irrational, even though like voting it has no instrumental value, and has some, though very slight, cost. 

Campaign advertising and other politicking—debates, the party conventions, etc.—try to excite voters about the election and induce them to vote for particular candidates, and in this respect closely resemble the advertising of consumer products and services. As Becker points out, much campaign rhetoric has little intellectual content, conveys little information, plays on the audience’s emotions, and so on, but in these respects it doesn’t differ much from the marketing of consumer products and services. 

What is wasteful is not the time people spend voting, since they vote only if on balance it is a more valuable use of their time than the alternatives; what may be wasteful is the amount of money that is spent on electioneering, and the amount of candidate time spent on money raising. As with product advertising, so with political advertising, much of the expenditure is offsetting, so that if collusion were permitted there might be a net social benefit. (That is the rationale for campaign expenditure limits.) But there might not be, because of the consumption value of the political advertising and its contribution to the value that people derive from voting.

What to Do about Illegal Immigration--Posner

The election has provoked a remarkable about-face by Republican leaders and conservative commentators, who apparently believe or pretend to believe that Romney lost the election because the harsh stand of the party on illegal immigration offended Hispanic voters. These leaders and commentators describe Hispanics as natural Republicans because almost all of them are Catholic and they tend to support conservative values on matters like abortion and homosexuality, and also because immigrants are naturally entrepreneurial and willing to work hard to get ahead in their new country. 

The exit polls do not support the proposition that Catholics are strongly influenced in voting for President by the Republican embrace of conservative family values. Nor have previous waves of immigrants, such as the Irish, Italians, and Jews, tended to vote Republican, although this will often change as their descendants become affluent or at least thoroughly Americanized. Asian-Americans, despite their economic success, strongly favored Obama in the election. Hispanics are on the whole rather poor, and thus seem a natural Democratic rather than Republican constituency. Yet undoubtedly Republicans would garner more Hispanic votes with the friendlier attitude toward immigrants that George W. Bush, for example, displayed during his Presidency. 

But whatever the Republican hopes and motives, the Republican about-face on illegal immigration is welcome. There are believed to be about 11 million illegal immigrants in the United States, the vast majority Mexican. There is no question of deporting them. Nor apparently is it feasible to prevent further illegal immigration from Mexico (offsetting the illegal immigrants who return voluntarily to Mexico, as many do), owing to the length of the U.S.-Mexican border and the many crossing points. Apart from the enormous resources that would be expended in serious effort to deport the existing illegal immigrants and prevent further illegal immigration, illegal immigrants are a significant fraction of the American labor force (it is estimated that 8 million of them work, which is 5 percent of the labor force), and the nation can hardly afford to lose so many workers. Illegal immigrants receive some government benefits, but fewer than legal workers, and they tend to work very hard. (In California, the expression “he works like a Mexican” is used to describe someone who works harder than he should.) They fill many jobs, particularly in agriculture, that are unattractive to U.S. citizens. They are a productive part of the U.S. economy. 

The current Administration has been energetic in seeking to deport illegal immigrants who are criminals (contrary to a widespread impression, it is not a crime to be an illegal immigrant as such, although of course it’s a ground for deportation). But the current Administration has, like its predecessors, left the other illegal immigrants pretty much alone. As a result the the millions of illegal immigrants live in a kind of limbo. 

So what should be done? The standard answer is to provide a “path to citizenship.” The difficulty is in doing this without reverting to the policy of unrestricted immigration that prevailed in the United States until the 1920s, a policy that would not be feasible now, given the density of the U.S. population today and the enormous size of the world population (7 billion). If government makes it easy for an illegal immigrant to become a legal immigrant and thus a citizen, this amounts to a policy of de facto unrestricted immigration. If one amnesties the entire existing illegal immigrant population (excepting criminals), one encourages further illegal immigration because there will be an anticipation of future amnesties. Coupling an amnesty with an effective policy of preventing future illegal immigration would be optimal if that prevention were feasible, but apparently it isn’t. 

The DREAM Act (not yet enacted, but the Administration has implemented a number of its provisions by executive order) seems an ingenious and realistic, though incomplete, compromise. It provides the “path to citizenship” to persons who are illegal immigrants by virtue of having been brought here as children by parents who were illegal immigrants. Illegals who having been brought here as children have grown up as Americans are indistinguishable from illegal immigrants’ children who having been born in the United  States have been U.S. citizens since birth. If you are a Mexican couple with children and are thinking of immigrating illegally to the United States, the fact that your children can eventually become U.S. citizens is an inducement to immigrate, but only a modest inducement because the parents will not be allowed to become citizens.

The DREAM Act is incomplete because most illegal immigrants immigrated to the United  States as adults rather than as children. So the question remains what to do about the adults’ status. One answer may be to allow them to become citizens, but to impose a penalty sufficient to reduce the flow of future illegal immigrants. Another may be to assist Mexico to raise the Mexican standard of living, since the rule of thumb is that when a nation’s per capita income reaches 40 percent of the American per capita income immigration to the United States from that nation will fall to a low level.

What to Do About Illegal Immigration? Becker

Governor Romney lost the election for many reasons, but one can hardly ignore the mean-spirited and often foolish discussion of illegal immigration during the Republican debates among their presidential candidates. Governor Romney improved his positions on illegal immigration during the presidential campaign, but not by enough. Hispanic voters are the fastest growing segment of voters in the U.S. and Romney suffered a devastating defeat among these voters. He received about 27% of their votes, whereas George W. Bush in 2004 had received 44% (the Republicans share of Asian voters also went down from 2004 by about the same amount).

 

I cannot say whether the Republican Party will become more enlightened on this issue, but changes in America’s approach to illegal immigration are necessary per se, and also as part of a major overall reform of immigration policy. The ideal approach to the illegal immigration issue would be to provide a pathway to citizenship for the approximately 12 million illegal immigrants already in this country, and for others who will come in the future.

 

As Posner indicates, the so-called Dream Act is a small step in this direction.  Once enacted, this Act would enable applicants to start on a path toward citizenship as long as they entered the U.S. prior to their 16^th birthday and graduated from high school, or have other education qualifications. Barring a change in immigration policy, some form of amnesty will be granted to other illegal immigrants who have been in this country for at least several years, although every amnesty program has the obvious problem that future illegal immigrants will also expect to be granted amnesty.

 

How to handle illegal immigration is only part of the problem with current immigration policies. The U.S. does not encourage enough skilled immigrants to come, and also requires legal immigrants to jump over numerous obstacles before they can enter. No wonder an increasing number of highly desirable immigrants are going instead to Canada and other destinations where they are more welcome.

 

For many years I have argued that the best way to reform America’s (and other countries’) immigration policy would be to allow all immigrants to enter if they can pay a given monetary fee. For illustrative purposes I have used the figure of $50,000, but the actual fee would be set by the supply of immigrants and America’s willingness to accept immigrants (for details see my short monograph, “The Challenge of Immigration: A Radical Solution”, 2011, IEA). I have shown why this approach would attract young, skilled, and ambitious immigrants who gain a lot both monetarily and in other ways from coming to America, including better opportunities for their children. This approach would also raise a sizable amount of revenue to the government at a time when additional revenue has a huge value.

 

Loan programs should and would be developed by companies, and also by the federal government, that would allow immigrants to borrow much of the money needed to pay the immigration admission fee. Immigrants would repay these “immigration loans” over time from the higher earnings here compared to their earnings in their countries of origin. There could be scholarships and discounts on the fees for particularly desirable immigrants, but the fee structure should not be made too complicated.

 

This approach of using immigration entrance fees would not only make overall immigration policy more sensible, but it would also go some way toward resolving the illegal immigration question. Immigrants who have been in the United States for a long time, and have done reasonably well and are raising families, hate living under the cloud and opprobrium of being here illegally. Many, probably most, of them would be eager to buy their right to citizenship by paying even sizable fees, especially if loans are available to help finance these fees. The perverse incentives that accompany amnesty programs would be eliminated since amnesty would no longer be needed or desirable.

 

In addition, many of those who might be coming illegally in the future from Mexico and elsewhere would now have a very attractive alternative; namely, to pay the entrance fee that gives them the right to come legally and permanently. Many of them would surely choose the legal option that is presently denied to them.

 

To be sure, the issue of illegal immigrants would not completely go away. Some migrants might still prefer to come illegally and save the immigration fee, especially if they plan only short stays in the United States. In addition, a small number of others who now come legally might decide not to pay the immigration fee by entering illegally.

 

Nevertheless, a reform toward allowing anyone to enter if they can pay the entry fee would go a long way toward attracting more immigrants. It would also reduce the hostility to immigrants because they would provide needed “tax” revenue, and they could no longer be said to have a free ride after they come. In addition, the illegal immigrant question would fade into a much more minor issue because the number of immigrants in the country illegally would decline by a substantial amount, and the number of persons entering illegally is likely also to decline, perhaps also by a lot.

 

 

 

 

 

The High Unemployment Rate and its Social Cost-Becker

The Bureau of Labor Statistics (BLS) on Friday released its report on employment and unemployment in October. Although greeted by most of the media as signaling pretty good news, it is “good” only in the sense that the labor market did not get any worse. Employment and unemployment remain very far from full employment levels fully 4 years after the financial crisis erupted in September 2008, and 3 years after the Great Recession officially ended (as defined by the NBER). In fact, this is the slowest recovery from a recession during the past half century in both employment and unemployment.

 

The unemployment rate remains stuck at slightly below 8%, and about 12 million men and women remain unemployed. Over 8.3 million persons still are employed part time because their hours were cut or they could not find a full-time job. Another 2.4 million persons are only marginally attached to the labor force, but are not counted as unemployed because they had not searched for work in the four weeks prior to the survey.

 

The major explanation for the very sluggish labor market is the slow recovery of GDP from the depths of the recession. When GDP is growing slowly-this growth has averaged about 2% during past 8 quarters- one can hardly expect employment to be growing rapidly or unemployment to be receding at a fast pace. In fact, the relation between GDP growth in the recovery from a recession and and the decline in unemployment is called Okun’s Law, named after the economist Arthur Okun who discovered this empirical regularity. One version of this law states that there is a 1% percentage point decrease in the unemployment rate for every 2% increase in GDP away from recession levels.

 

This law is far from exact, but it does bring out in a simple way that unemployment is unlikely to be decreasing rapidly from recession levels if GDP is recovering slowly. Okun’s Law was not operating in the early stages of the Great Recession because workers were being laid off at much faster rates relative to the decline in GDP than would be predicted by this Law. However, the connection between the recovery in unemployment and the growth in GDP during the past couple of years has been more in line with Okun’s observations (I am indebted to discussions with Edward Lazear on these issues).

 

The extension of unemployment benefits to 99 weeks, or almost 2 years, is a public policy change that has raised the unemployment rate (see Casey Mulligan’s recent book, The Redistribution Recession). When the government is helping to support unemployed persons for up to 99 weeks, some of the long-term unemployed will look less diligently for work.

 

This brings us to the most disturbing aspect of the high unemployment rate during the past 4 years; namely, the large number of the unemployed who have been out of work for at least 6 months. Last month 5 million men and women had been unemployed for at least 6 months, and they comprise about 40% of all the unemployed. This fraction has been stuck at a little over 40 percent since the first quarter of 2010. Moreover, a truer picture of the extent of long-term unemployment requires the inclusion also of most of the 2.4 million individuals who have given up looking for work.

 

During past recessions, the U.S. typically has had relatively low rates of long-term unemployment, especially in comparison to most Western European countries. But that is no longer the case. American long-term unemployment has been so high during past few years partly because of the extension of unemployment compensation to 99 weeks, and partly because of the slowness of the recovery during this recession compared to previous recessions. Another contributor is the decline in sectors, such as parts of manufacturing, which will never recover fully. Since workers who invested a lot of their human capital in declining sectors would have to take a big hit in earnings if they take jobs in most other sectors, they may continue to look for jobs in sectors where their human capital is more valuable.

 

Long-term unemployment creates several long run social costs in addition to the psychological and other damage from being unemployed for many months. Some of the long-term unemployed become discouraged and leave the labor force prematurely rather than continuing to look for the work that has eluded them for many months. This is especially likely for the older unemployed since they take much longer to find jobs. In addition, younger workers who have been unemployed for a long time and are not highly skilled may retire from the regular labor force to enter the informal labor market where they are only sporadically employed. Food stamps and other benefits help them supplement their occasional earnings from jobs.

 

Persons who have been out of work suffer some erosion in their job skills because they have not been using them. This is obviously a much bigger problem for the long-term unemployed. Most workers can probably manage up to six months of unemployment without much skill erosion, but after that it can become a problem, particularly for persons with skills in fields that are changing more rapidly.

 

Much cyclical unemployment involves a waste of time and productivity, but the social cost is especially severe for the long-term unemployed. Unfortunately, the past several years has seen a dramatic rise in this group, not only in absolute numbers, but also as a fraction of all unemployed workers. This social cost of long-term unemployment has received insufficient attention from the media and during this presidential campaign.

 

 

 

 

The Problem of the Long-Term Unemployed--Posner

It is straightforward to enumerate bad effects of being
unemployed for a long time, such as erosion of skills, loss of contacts, and
reluctance of employers to hire a person who has been unemployed for a long
time (this is because employers often use a person’s having been unemployed for
a long time as a signal of lack of commitment to or fitness for employment).
But it is difficult to make a precise estimate of the gravity of the problem. 

For one thing, there is no nonarbitrary definition of “long
term.” Is it six months? (Many women are out of the work force for longer
because they have young children, yet do find jobs when they return, albeit
often at a lower wage than if they had remained in the labor force continuously.)
A year? One would have to know the average rate at which job skills erode,
contacts diminish, or potential employers’ suspicions grow, to be able to determine
the economically meaningful cut off. 

And even if this hurdle could be surmounted, it is unclear
who actually is “unemployed” and who simply has left the work force (retired
early, become a housewife or house husband and thus substituted household
production for paid work, become disabled, or interrupted work to go to college
or to a professional school). The number of people who are unemployed in the
Bureau of Labor Statistics sense—not employed at present, but looking for
work—understates the number of long-term unemployed, because some of the
long-term unemployed have become discouraged, ceased looking for work, and thus
are no longer counted as unemployed. No one knows for sure how many such
discouraged workers there are, but the Bureau of Labor Statistics estimates
that there currently are 800,000 id rgwn. This actually is rather few relative
to the 5 million long-term unemployed, that is, unemployed who are still
looking for work. 

Notice too that people who leaves the labor force are not
necessarily unemployed in an economic sense. Household production is real.
Apart from the obvious examples, a person who retires early to help with
raising a grandchild, thus freeing up the parents to devote more time to paid
work, is productively though not formally employed. This is true even if the
person is still looking for a paid job, and regards his stint as a household
producer as temporary. The difficulty of valuing the household production of
the long-term unemployed makes the cost of long-term unemployment to the
economy difficult to assess, although it is certainly positive. 

A final problem in estimating the social costs of long-term
unemployment is measuring the long term. Here one should distinguish between
long-term unemployed in the BLS sense—unemployed for a long time but still
looking for work—and unemployed who have stopped looking for work, whom the BLS
as I said calls discouraged workers. The unemployment rate in the United States
was very high throughout the 1930s, and many of the unemployed must have been
unemployed for years, yet that doesn’t seem to have left a residue of discouraged,
prematurely retired workers. Eventually most of them must have found jobs, and
not just during the World War II labor shortage, since low unemployment
persisted after the war ended. Surprisingly, of the 5 million long-term
unemployed still looking for jobs today, 1.7 million have been unemployed for
more than 99 weeks—and they are still looking. As the economy continues to
recover, assuming it does so, more will look for—and find—jobs. According to
the latest BLS statistics, in the past year the number of discouraged workers
has dropped by 16 percent, from 967,000 to 813,000. That is a promising sign. 

Long-term unemployment may turn out not to have a long-term
effect on the economy. Or may—for even though the economy has improved over the
past year, the number of long-term unemployed (the 5 million) has not declined.
This may reflect a reduced demand for workers, because of automation and (as
Becker points out) decline of manufacturing, which are economic changes
independent, or largely so, of the depressed state of the U.S. economy as
a whole.