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.