Long-Term Unemployment is Here to Stay

...at least until most of the Baby Boomers retire, no matter who is President.

I just read this article yesterday from the Wall Street Journal by Ben Casselman that touches on many points about the long-term unemployed that the media has neglected to mention, with an exception to a few articles, such as How a New Jobless Era Will Transform America and The New Poor; Dwindling Prospects. (my added remarks below)

Unemployment Scars Likely to Last for Years

The U.S. job market is showing signs of a sustained recovery. But the country's prolonged struggle with unemployment will leave scars that are likely to remain for years, if not generations.

The latest labor-market snapshot, out Friday, gave cause for continued, if tepid, optimism. U.S. employers added 200,000 jobs in December, and the unemployment rate ticked down to 8.5%, its lowest level since early 2009.

But economists gathered here for the American Economic Association's annual convention took a longer and generally dimmer view. Even if recent progress continues, the recession already has had a lasting effect on a generation of workers. Worse, the crisis has laid bare problems in the U.S. labor market that won't quickly recover when the economy eventually rebounds. And the longer that unemployment remains high, the greater the risk that it will create structural problems that will endure.

The economists here, mostly academics, are studying the causes and effects of the jobs crisis from different angles, and they frequently disagree. Nonetheless, a few common themes emerge.

Long-term unemployment may be a bigger problem than high unemployment.

Americans have been understandably frustrated by the slow pace of job growth. But economists say much of that slowness is explained by the weak economic growth since the recession ended more than two years ago. In that sense, the problem isn't the "jobless recovery" but rather that the recovery itself has been so weak. If the recovery gains steam—as some economists believe has been happening in recent months—the growth in jobs should pick up as well.

Unprecedented rates of long-term unemployment could threaten the economy's recent gains. Some 5.6 million Americans have been out of work at least six months, 3.9 million of them for a year or more. Research shows that the longer people are unemployed, the less likely they are to find jobs. Economists aren't sure why—to what degree it's because workers' skills deteriorate, or because they find ways to cope and give up looking for work, or whether the stigma of being unemployed for so long makes companies unlikely to hire them—but the effect is the same: Many of the people out of work the longest likely will never work again.

The risk, economists say, is that the U.S. will develop an underclass of semi-permanently unemployed workers, with severe consequences for productivity, public finances and even social stability. Europe, which faced a similar problem in the 1980s, is still dealing with the consequences.

"We know that once you get into that type of situation it's very hard to get out," said Steven Davis, a professor at the University of Chicago's Booth School of Business.

Many problems predated the recession.

The recession caused a dramatic rise in unemployment, but it also revealed deeper challenges that had been brewing for decades. By a wide range of measures, the U.S. labor market has over the past two decades lost much of the edge it enjoyed over other developed countries. The big gains in education in the early 20th century have slowed. Americans are moving less frequently and changing jobs less often, making the job market less flexible. And most critically, a smaller share of Americans are working. The labor force participation rate—the percentage of adults who are working or looking for work—peaked in 2000 and has been falling for more than a decade.

Economists don't agree on what is behind the shift, although the aging of the baby-boom generation is almost certainly part of the answer. But whatever the reason, the effect is a labor market that recovers less quickly when it runs into trouble, a trend that was evident in the slow pace of hiring after the recessions of the early 1990s and 2000s. The recent recession exacerbated the trends, but it didn't create them, said Harvard economist Lawrence Katz.

"Even if we had never had the Great Recession/lesser depression and the world had stayed the way it was in early 2007, we were already in a pretty sluggish labor market," Mr. Katz said.

The recovery is only the beginning.

Increased hiring and a falling unemployment rate are good signs, economists say. But even if the unemployment rate were to return to a healthy level by the end of the year—an outcome almost no experts predict—the labor market would still be far from healed. The length and depth of the crisis, unprecedented since the Great Depression, will have a lasting effect on both individuals and the economy as a whole.

For individuals, a growing body of research points to long-term effects of unemployment, especially during recessions. A recent paper by Mr. Davis and Till von Wachter, a Columbia University economist, found that workers who lose their job when unemployment is low—below 6%—lose on average 1.4 years' worth of earnings, a substantial blow. But those who lose their jobs when unemployment is above 8% lose twice as much, 2.8 years' worth of their pre-job-loss wages, which the authors call "staggering."

Mr. von Wachter and colleagues also found that unemployed workers' earnings fall 1% for each additional month they are out of work, and that those losses can last for years even after they find another job. Other researchers have found that unemployment can take a toll on family relationships, mental and physical health, and even the economic prospects of jobless workers' children.

"There are people who are going to bear scars for the rest of their careers," said Henry Farber, an economist at Princeton University.

For the broader economy, the stakes may be even higher. The long-term decline in manufacturing has eroded a major source of stable jobs that pay well. The construction boom of the mid-2000s helped offset those losses, until the housing market collapsed and took home builders with it. And the slow recovery has put a premium on productivity, giving companies incentives to invest in technology that lets them produce more with fewer workers—a trend that has spread from manufacturing into the service sector.

Much of the recent job growth, meanwhile, has come in the health-care and hospitality sectors, which generally employ many low-skilled workers at low wages. Those jobs help shrink the unemployment rolls, but they don't replace the middle-class jobs that have been lost in the manufacturing and construction sectors.

"A huge issue is going to be the quality of jobs and whether we'll have a type that generates a shared prosperity," Mr. Katz said.

The challenge facing the country, then, is not just putting people back to work, but helping to retrain and rehabilitate the long-term unemployed, reversing a multidecade stagnation in the labor market, and finding a new source of jobs to rebuild the middle class. No one in Chicago had any easy solutions.

E-mail Ben Casselman

My added remarks regarding Ben Casselman's article

Ben Casselman stated in his article "some 5.6 million Americans have been out of work at least six months, 3.9 million of them for a year or more." But how can that be?

A little over two years ago (113 weeks ago) we had 15.7 million people unemployed in October of 2009 when the unemployment rate was at 10.2% - - and they have all exhausted their jobless benefits since that time (99 weeks max). It's been reported that over 8 million jobs had been lost since the start of the recession.

Only 3 million net new jobs were created since October of 2009, so at the very least, 12.7 million Americans must have been out of work for over 2 years or more. Not "3.9 million for a year or more.'

We also had many more layoffs since October of 2009.

Add to that, we also had another 6 million high school and college graduates since that time as well. They ALL didn't just "drop out" of the labor force and move in to their parent's basement.

A few retired with reduced Social Security benefits if they were 62 or older, some applied for Social Security Disability, some left the country, some started their own business, some are being supported by others, and some passed away....but what about everybody else. Where did 15 million people go?

Ben Casselman also stated in his article "The labor force participation rate—the percentage of adults who are working or looking for work—peaked in 2000 and has been falling for more than a decade."

That's because 56,190 manufacturing facilities were outsourced overseas during that period of time. Also, see this link and this link for historical charts, the break down of jobs created, and the "participation rate" of the work force.

It's become common knowledge we've had a long-term problem with the outsourcing of jobs, depressed wages in the private sector, and low taxes on the wealthy (the Bush tax cuts). Hence, the well-documented arguments about income inequality.

When domestic jobs go overseas, those wages feed a foreign economy. Depressed wages means less capital fueling our own economy. Government workers haven't been "over-paid" (but paid to keep up with inflation). It's the private sector that has been "under-paying" for years. That's why corporations have made such a concerted efforts to bust up labor union membership.

Low taxes and corporate loopholes can't provide the necessary revenues needed for government services/jobs, meaning less capital in the economy. All these fewer jobs increases the cost to government in the form of unemployment benefits, Medicaid, TANF, and food stamps.

We need to eliminate ALL corporate loopholes so that the "effective" tax rate is 35%, rather than the 18% that they've averaged over the past 25 years. Then maybe we can actually lower the their rate to 25% like in China.

We need to tax capital gains as "regular income" according to an individual's tax bracket. CEO's stock options (bought at strike price) shouldn't be taxed after they're vested one year at only 15%. "How the 1% bilks the 99%"

We need to cut defense spending by at least 15% a year. We don't need our soldiers stationed in Europe pumping their paychecks into the local economy. This is also where most of the waste, fraud, and abuse occurs.

Corporations should be doing their own research, rather than using taxpayer-funded R&D, and then using it to profit from us. And subsidies for big oil and tobacco companies subsidies are just plain insane.

Our population has doubled since the 1950s, but tax rates for corporations, capital gains, and upper income individuals have fallen. "Bigger government" is needed for maintaining social services for more people, and the tax rates should meet that need, rather than starve services for those most in need just so those at the top can keep more of what they don't need at all.

Just putting more money in people's pockets (no matter if it's with a well-paying job so they can earn a "living wage" or food stamps), it will drive the economy. Low income people immediately put all their cash back into the economy; middle income people will also save and invest; and the very wealthy will also hoard....like they've been doing. "We have a Revenue Problem, Not A Spending Problem"

Long-term unemployment is here to stay, no matter who is President. But if you vote for [Progressive] Democrats, we'll at least have a much better chance of getting money out of politics and reforming the tax code to a much fairer system.

My related posts:

• Low Wages Kills Jobs, Not High Taxes
• Trade Agreement Passes in Middle of Job Crisis
• Apple Inc. is Rotten to the Core
• Trade Agreement (TAA) Held Hostage for Jobless Benefits
• America's Race to the Bottom
• Corporations & Banks Now Sit on $3.6 Trillion
• Obama is Giving Away the House

How the CEOs and Hedge Fund Managers are faring:

• Subsidies for the Rich and Famous
• Historical Tax Rates on the Rich (1862 to 2011)
• The Second Gilded Age: History Repeats Itself
• Mellon: The Banker Who Rigged the U.S. Tax Code
• The GOP Tax Plan - Ignorance, Insanity, or Greed?
• We have a Revenue Problem, Not A Spending Problem
• 280 Corporations are "Too Big to Tax"
• Trickle-Down Economics: The Cruel 30-Year Hoax
• You Pay Hidden Entitlements for the Rich