Long-Term Unemployment—Posner

I have little to add to Becker’s persuasive analysis.

 

Among the many reasons to regard the current economic situation as dire is the high incidence of long-term unemployment. More than 40 percent of the unemployed have been unemployed for more than six months, and there are reasons to expect long-term unemployment to remain at or near its present level (or even rise) for some time to come. One reason is shifts in consumption. If consumption patterns remain unchanged throughout a downturn, or if the downturn is so short that when it’s over consumers resume their previous consumption pattern, then most of the unemployed can expect to be rehired in their old jobs, for which they are trained and in which they may have firm-specific human capital, making them more valuable to their old employer than they would be to a new one. But if the downturn is protracted and consumers as a result make durable changes in consumption, many old jobs will disappear (“job destruction,” economists call this phenomenon).

 

The longer the downturn, moreover, the more young people will be competing for jobs when it ends, and this make it difficult for the long-term unemployed to find jobs. It is hard for older workers to compete with younger ones for new jobs in which the older workers have no specific human capital. Other things being equal, employers generally prefer younger workers because they have less interest in unions (younger workers are less likely to remain in the same job, and unions therefore cater to older workers) and lower salary expectations, and are healthier and so do not cost as much in health benefits as older workers do (not that all employers offer health benefits, of course).

 

Older workers are more likely, moreover, to own their home and to have ties to their community. With house prices severely depressed, homeowners are reluctant to sell because there is not enough equity in their house to enable them to buy another house. This makes them all the more reluctant to search for a job in a different community.

 

The longer a worker is out of work, the less likely he is to get another job comparable to the one he held. This is not only because skills atrophy if unused, and the worker ages during his period of unemployment, but also because employers may take the worker’s long layoff as evidence that he lacks commitment to working or that other prospective employers found something lacking in him, which is why he has gone so long without finding another job.

 

The long-term unemployed exert political pressure for extension of unemployment benefits, and their plight—they are likely to have used up their savings—triggers an altruistic response that makes their political pressure more effect. But unemployment benefits delay re-employment by reducing the cost of search for a new job. And the cost of unemployment benefits contributes significantly to our soaring federal deficits—unemployment benefits are expected to cost the government about $250 billion this year.

 

What can be done about the problem of long-term unemployment? Nothing that is politically feasible. A job-subsidy bill is wending its way through Congress. It is hard to see how it can have any effect. Apart from the reason Becker gives, a job subsidy is likely to have a very indirect and limited effect on demand for goods and services, and without an increase in demand firms have no incentive to add workers even if a new worker’s wage is subsidized. Suppose a firm is producing 1,000 units of output a year with a work force of 30, and it adds a 31st employee and thereby qualifies for a $5,000 tax credit. The firm’s total costs will have risen by the wages and benefits that he pays the new employee minus $5,000, unless the new, cheaper worker enables the firm to obtain a greater saving because the worker substitutes for some capital input. Unless that happens, then because the firm’s sales will not have risen, the firm’s participating in the job-subsidy program will reduce its profits (revenue minus cost).

 

The only solution to the problem of long-term unemployment that would not impair the operation of the labor market would be, as Becker points out, rapid economic growth, which would increase the demand for labor by more than the annual increase in the number of persons in the labor force. But it does not appear that any significant measures to accelerate economic growth are politically feasible. Measures that might be effective, such as reforming the immigration laws, reforming the tax laws, reducing the power of unions, reducing the minimum wage, eliminating agricultural subsidies, fighting protectionism, and reducing government subsidies of pensions and health care, are off the political radar screen for now and the foreseeable future.

Comments

[DJ Stat]

The interesting question intimated by your analysis is whether sustained long-term unemployment (relative to, I guess, the natural rate of unemployment within the given country) in and of itself has an effect on the political calculus of what you deem to be 'off the political radar screen' reform options or else, whether additional endogenous or exogenous events must occur before actually useful political economic reforms can be implemented.

Put differently, it is a question of whether systems of political economy are self correcting over the medium or long-term and if, more particularly, the self-correcting mechanism is triggered by high rates of unemployment.

A similar question might be posed with regard to entitlment program reform--the analogical tie being growth in external debt; the analogical question being whether such external debt growth will in and of itself encourage useful reform measures or not.

In a way, we're thus living in an interesting natural laboratory right now. We get to ask great questions about the ties between economic conditions and political reform. My only concern is that, if the experiment fails, we may all be doomed.

But at least it will be an intellectually stimulating doom.

[Jack]

Posner sez: "The long-term unemployed exert political pressure for extension of unemployment benefits, and their plight—they are likely to have used up their savings—triggers an altruistic response that makes their political pressure more effect. But unemployment benefits delay re-employment by reducing the cost of search for a new job."

Maybe......... though with 40% having been unemployed for more than six months (indicative that the job search is a tough one at best) the benefits delay the day the home is foreclosed or the car goes back to the bank or car lot, and helps at least some businesses to weather these very challenging times and avoid even more layoffs.

Then: "Suppose a firm is producing 1,000 units of output a year with a work force of 30, and it adds a 31st employee and thereby qualifies for a $5,000 tax credit. The firm’s total costs will have risen by the wages and benefits that he pays the new employee minus $5,000, unless the new, cheaper worker enables the firm to obtain a greater saving because the worker substitutes for some capital input. Unless that happens, then because the firm’s sales will not have risen, the firm’s participating in the job-subsidy program will reduce its profits (revenue minus cost)."

Well, of course it's not going to work until sales improve or some sign of light at the end of the tunnel shows up, but at the margin the credit should spur some hires at an earlier date than would otherwise be the case, just as the $8,000 housing credit would not cause a non-buyer to make a $150k or more purchase, it surely created urgency among those who were considering the purchase of their first home. "Indirect and limited" to be sure, but after lamenting the cost of unemployment, above, surely moving even a few off the dole is both good business and beneficial to the job seeker and the mood of the country.

FURTHER reductions in the purchasing power of the min wage? If a job to be done doesn't produce a profit or at least solve a problem at $60/day is lowering it to $40 likely to do anything? And what is the benefit to our society of yet more employees who can not afford to house and feed themselves, much less pay for medical care or participate in consumer spending?

If the answer is the tired "Well it's for the young and new entrants" and you want an apprentice program, let's have the apprentice program; many American workers and youth could benefit from more on the job training.

Tax reforms take a long time to implement and yet longer to have much of any effect, so we're late to the party for this mess, but one I'd like to see is that of shifting some of the income tax burden to taxes on non-renewable resources. Done right as revenue neutral for most it would have the effect of conserving our energy dollars and keeping them here in our economy, while lowering income taxes would make it more efficient to hire each other's expertise rather than trying to do as many do-it-yourself projects

[Bruce]

Judge Posner writes, "A job-subsidy bill is wending its way through Congress. It is hard to see how it can have any effect. Apart from the reason Becker gives, a job subsidy is likely to have a very indirect and limited effect on demand for goods and services, and without an increase in demand firms have no incentive to add workers even if a new worker’s wage is subsidized. Suppose a firm is producing 1,000 units of output a year with a work force of 30, and it adds a 31st employee and thereby qualifies for a $5,000 tax credit. The firm’s total costs will have risen by the wages and benefits that he pays the new employee minus $5,000, unless the new, cheaper worker enables the firm to obtain a greater saving because the worker substitutes for some capital input."

I think you miss the mark a bit in this analysis. You're not accounting for the fact that these new hires now have a bunch of fresh disposable income. This disposable income directly increases aggregate demand.

If we assume that firms don't have to clear their books in the same period that they hire workers, then (forgetting about interest for now), so long as the initial cost of a worker is less than the subsidy, it is in a firm's interest to hire a worker -- at least initially. Then, the increase in aggregate demand that arises from this splurge of new hires should lead to more consumption demand, on average, for each firm. Keep in mind that there is a multiplier effect here, and so the idea is that a subsidy today will lead to enough of an increase in demand in the (immediate) future to offset future short term costs to the firm.

You rightly point out that this subsidy might not be high enough. That is to say, the subsidy needs to actually be large enough to induce firms to hire people initially so that aggregate demand has the opportunity to increase in the next period. One can only hope that President Obama's econometricians have been able to solve for such an optimal subsidy.

This subsidy might also be more desirable than a direct tax break to consumers. Those who already work, and thus have the most to gain from a tax break, are more likely to save a higher amount of their income than the unemployed -- this is because they (a) have more income already and (b) are probably fearful because of the current state of the economy. On the other hand, those who would benefit immediately from this tax break are unemployed people. They are going to spend nearly the sum total of their wages because they have a more immediate need to spend.

Finally, I think that from a less economics-y view, and from a more political view, this acts as a signal to consumers that the employment situation might soon improve. This would relax fears and might induce more immediate spending.

-------
However, overall I think I agree with you that such convoluted measures are purely theoretical at worst, and only partially effective at best. I think real economic change can only come from dealing with some of the issues you raise: farm subsidies, unions, immigration and taxation.

[Cheap Computers Canada]

Employment is a world wide issue and its the base of all evils

[Gordon Longhouse]

I don't know about the base of all evils, but security and dignity of employment is the number one challenge of free market economics and democratic politics.
Labour is an input that, like other inputs, is in greater and lesser demand over time. Posner is right to say that rapid long term economic growth is the only way to make a genuine change in the rate of unemployment but rapid economic growth brings with it the risk of inflation, asset bubbles, malinvestment followed by depression and eventually unemployment. Unemployment is an inevitable feature of the business cycle regardless of incentives and political and economic structures.
Those most vulnerable to unemployment are aware of their vulnerability and seek to ameliorate it in the only place where they have a modicum of power: the ballot box. Political solutions may not be the right solutions but from the point of view of the unemployed, they are the only solutions available.
The seeking of a political solution to an endemic economic problem, goes some way to explaining communism and fascism in the early Twentieth Century and to explaining climate change denial, anti-free trade rhetoric and various job creation schemes now.
In the absence of an economic solution to the riddle of unemployment, a political solution that at least gives assurance that the powers that be are concerned about their plight and that gives the unemployed a degree of dignity by admitting that their state is not their fault needs to become the second best solution.
What is required is a program that gives the most assurance and comfort to the unemployed at the least economic damage to the economy that we hope will eventually employ them.
If free market economists were the face up to the short comings of the market from the point of view of those most vulnerable to it, and to the need for second best solutions, their advice may be more useful.

[Michael Strong]

Employment is not that complicated: people work and are paid to produce something useful that is something others will buy. Their pay is taxed. If people are paid NOT to work through benefits not funded through insurance premiums (I consider social security and medicare as funded systems but the benefits squandered by incompetence), either somebody else's taxes pay for this or the money must be borrowed. Today, we have the absurd situation of excessive borrowing and unemployment. You would expect the unemployed to find a way of paying off their debts by working. Work can only be created locally, here, and it only makes sense to create work here if there are unemployed people here. But it also only makes sense to create work here, if the opportunity of wealth outweighs costly interference from the IRS, the EDD, the numerous regulatory authorities, not to mention local taxes. If it is easier for me, unemployed, to be paid by the EDD or from Federal tax credits, I will do that even if it means faking dependents and head of household situations.

[Peter Davis]

Is it reasonable for supporters of free enterprise and limited government to talk about workfare? I think there are ways it can ultimately result in less government and more security.

Rather than allowing politicians to use tax dollars to buy votes by promising job creation through their pet programs, link "workfare" programs to community based plebiscites. The goal is to get useful things done with a minimum of political manipulation. There are certainly a number of complex issues that need to be addressed here, and I fully agree that a robust economy is the best protection against unemployment.

Unfortunately, large portions of the electorate are not sufficiently resourceful or patient enough to wait for the economy to improve and thus become easy prey for the vote buyers. In the meantime, it seems reasonable to explore ways to set up a well organized, efficient "workfare" program.

[Cheap Computers]

Over here almost 50% people are unemployed which has converted the ratio of robbery alot.

[sesli chat]

I don't know about the base of all evils, but security and dignity of employment is the number one challenge of free market economics and democratic politics.
Labour is an input that, like other inputs, is in greater and lesser demand over time. Posner is right to say that rapid long term economic growth is the only way to make a genuine change in the rate of unemployment but rapid economic growth brings with it the risk of inflation, asset bubbles, malinvestment followed by depression and eventually unemployment. Unemployment is an inevitable feature of the business cycle regardless of incentives and political and economic structures.
Those most vulnerable to unemployment are aware of their vulnerability and seek to ameliorate it in the only place where they have a modicum of power: the ballot box. Political solutions may not be the right solutions but from the point of view of the unemployed, they are the only solutions available.
The seeking of a political solution to an endemic economic problem, goes some way to explaining communism and fascism in the early Twentieth Century and to explaining climate change denial, anti-free trade rhetoric and various job creation schemes now.
In the absence of an economic solution to the riddle of unemployment, a political solution that at least gives assurance that the powers that be are concerned about their plight and that gives the unemployed a degree of dignity by admitting that their state is not their fault needs to become the second best solution.
What is required is a program that gives the most assurance and comfort to the unemployed at the least economic damage to the economy that we hope will eventually employ them.
If free market economists were the face up to the short comings of the market from the point of view of those most vulnerable to it, and to the need for second best solutions, their advice may be more useful.

[aaa designer handbags]

Rather than allowing politicians to use tax dollars to buy votes by promising job creation through their pet programs, link "workfare" programs to community based plebiscites. The goal is to get useful things done with a minimum of political manipulation. There are certainly a number of complex issues that need to be addressed here, and I fully agree that a robust economy is the best protection against unemployment.

Unfortunately, large portions of the electorate are not sufficiently resourceful or patient enough to wait for the economy to improve and thus become easy prey for the vote buyers. In the meantime, it seems reasonable to explore ways to set up a well organized, efficient "workfare" program.

[gucci large canvas shoulder bag]

The interesting question intimated by your analysis is whether sustained long-term unemployment (relative to, I guess, the natural rate of unemployment within the given country) in and of itself has an effect on the political calculus of what you deem to be 'off the political radar screen' reform options or else, whether additional endogenous or exogenous events must occur before actually useful political economic reforms can be implemented.

Put differently, it is a question of whether systems of political economy are self correcting over the medium or long-term and if, more particularly, the self-correcting mechanism is triggered by high rates of unemployment.

A similar question might be posed with regard to entitlment program reform--the analogical tie being growth in external debt; the analogical question being whether such external debt growth will in and of itself encourage useful reform measures or not.

In a way, we're thus living in an interesting natural laboratory right now. We get to ask great questions about the ties between economic conditions and political reform. My only concern is that, if the experiment fails, we may all be doomed.

But at least it will be an intellectually stimulating doom.

[diarea]

The only solution to the problem of long-term unemployment that would not impair the operation of the labor market would be, as Becker points out, rapid economic growth, which would increase the demand for labor by more than the annual increase in the number of persons in the labor force.

I totally agree to this point

[vacuum pump]

More than 40 percent of the unemployed have been unemployed for more than six months...

Im one of this 40 percent :(

[diarea]

too bad to be true

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[ffxiv gil]

The seeking of a political solution to an endemic economic problem, goes some way to explaining communism and fascism in the early Twentieth Century and to explaining climate change denial, anti-free trade rhetoric and various job creation schemes now.

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[scoremore]

Its not just America suffering through a rough Economy & the way to make Unemployment Insurance less expensive is to put people back to work & have more people paying into it.

[turks and caicos villas]

Long-Term Unemployment is a world wide problem, not only USA is suffering, in Europe the situation is even worse. Hard times...waiting for some good news!

[lower back pain]

In the absence of an economic solution to the riddle of unemployment, a political solution that at least gives assurance that the powers that be are concerned about their plight and that gives the unemployed a degree of dignity by admitting that their state is not their fault needs to become the second best solution.
What is required is a program that gives the most assurance and comfort to the unemployed at the least economic damage to the economy that we hope will eventually employ them.
If free market economists were the face up to the short comings of the market from the point of view of those most vulnerable to it, and to the need for second best solutions, their advice may be more useful.

[Emma]

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