Princeton University professor Alan Krueger dives deep into the problem of long-term unemployment in a new paper to be presented Thursday at the Brookings Institution. He calls people who have been out of a job for six months or more an “unlucky subset of the unemployed” who exist on the margins of the economy -- with faint hope of returning to productivity. Here are five takeaways from his paper, co-authored with Judd Cramer and David Cho of Princeton.
1. Long-term unemployment has little impact on inflation
One of the many questions arising from the Great Recession that has perplexed economists is why inflation has not fallen even farther than it has. Conventional economic theory calls for a decline averaging one percentage point a year between 2009 and 2013, when the unemployment rate averaged 8.7 percent. Instead, inflation declined by an average of just 0.2 percent points.
What happened? Krueger’s paper builds on previous work suggesting the reason is because many of the unemployed have been out of work so long that they no longer exert much pressure on wages, and hence, inflation. Instead, it’s the short-term unemployment rate that correlates most closely to changes in pay and prices.
2. The long-term unemployed have a hard time not only finding a job, but also keeping one.
The paper uses data from the Current Population Survey to track what happens to the long-term unemployed over 16 months. It found only about a quarter of people were hired within a few months of the survey. Of those, about 35 percent were unemployed once again or left the labor force within a year.
Overall, only about 11 percent of the long-term unemployed were in steady, full-time work after 16 months.
“It appears that reemployment does not fully reset the clock for the long-term unemployed,” the paper states.
3. Long-term unemployed who leave the labor force are unlikely to come back
Roughly one in 10 of the long-term jobless left the workforce altogether within a few months of the survey, and most of them stayed out of the labor market after a year. The paper notes that the most common reason for leaving is that they no longer wanted a job, suggesting the decision is permanent.
4. The long-term unemployed stay in their field
Krueger analyzes the short-term and long-term jobless who were rehired in 2012 and the industries in which they found work -- and finds they look very similar to the industries they left. For example, about 27 percent of the long-term unemployed who found jobs that year previously held blue-collar positions. Conversely, about 26 percent of the hires in blue-collar jobs that year were long-term unemployed.
Here’s another way to look at this: There is no sign that long-term unemployed will make a big career switch. Despite lots of discussion about retraining workers for jobs in fast-growing industries such as health care, they tend to find employment in the fields they know best.
5. A stronger economy doesn’t hurt -- but it doesn’t help much, either
The paper hones in on how the long-term unemployed have fared in the 13 states with the lowest jobless rates as of last fall: Hawaii, Kansas, Minnesota, Montana, Nebraska, New Hampshire, North Dakota, Oklahoma, South Dakota, Utah, Vermont, Virginia and Wyoming. The average unemployment rate among those states was 4.3 percent, compared to the national rate of 7 percent.
Yet even the states with strong labor markets suffered a sharp rise in long-term unemployment that peaked at 4.5 times their historical average. That’s close to the quintupling of long-term joblessness seen in high-unemployment states. The difference in the probability of finding a job since the recession is only slightly better in strong markets than in weak markets.
“Overall, there is little evidence in this comparison to suggest that the long-term unemployed fare substantially better in the states with the lowest unemployment rates, consistent with the idea that the long-term unemployed are on the margins of the labor force, even where the economy is stronger.”
So now what?
The stubbornly high rate of long-term unemployment is one reason some officials at the Federal Reserve have cited for keeping interest rates near zero. Some have even argued that the Fed should keep rates low even after the unemployment rate has returned to more acceptable levels in hopes of drawing people who have left the labor force back into the fore. But Krueger’s paper seems to suggest that there is little more the Fed can do to help those workers -- and that it risks stoking inflation if short-term unemployment falls too far in the process.
In the paper, Krueger deftly dodges those issues, befitting someone who until last year was the chief economist at the White House. He merely points to the need for a “broad array of policies” to tackle the problem of long-term unemployment. The responsibility, he suggests, falls on all of us:
Some may wish to draw macroeconomic policy implications from our findings. Only time will tell if inflation and real wage growth are more dependent on the short-term unemployment rate than total unemployment rate. To us, the most important policy challenges involve designing effective interventions to prevent the long-term unemployed from receding into the margins of the labor market or withdrawing from the labor force altogether, and supporting those who have left the labor force to engage in productive activities. Overcoming the obstacles that prevent many of the long-term unemployed from finding gainful employment, even in good times, will likely require a concerted effort by policy makers, social organizations, communities and families, in addition to appropriate monetary policy.