What we'd expect, then, is that the odds of becoming long-term unemployed would rise and fall with the unemployment rate. Which, as we'll get to in a second, is indeed what has happened. Now, I was able to calculate that first part by looking at the Current Population Survey's microdata to see how many people had become unemployed every month going back to 1998, and how many of them still were six months later. Then I compared that with the unemployment rate at the time they started their job search. The result, as you can see below, is that there's a strong relationship between the two. In fact, the unemployment rate explains 87 percent of the chance you'll end up long-term unemployed. When joblessness is 5 percent, those odds are only 5 to 10 percent themselves. But when it gets up to 10 percent, they spike to 25 to 30 percent.
In other words: the higher the unemployment rate, the higher your odds of being unemployed for a long, long time.
That actually means there's some good news now. Unemployment has finally fallen far enough, down to 4.9 percent, that the odds of becoming long-term unemployed are almost back to where they were before the recession. Those are 10.2 percent today compared to the 9.7 percent they averaged between 2005 and 2007. It's been slow, it's been steady, and it might not have won the race, but after eight years it has gotten things back to normal-ish.
The question is if we can drop the "ish." And the answer depends on the Federal Reserve. Why is that? Well, as you can see below, the economy has added just enough jobs for our long-term unemployment odds to decline three to four percentage points a year from its peak of 31.2 percent in 2009. That's gotten the labor market working again like it should — which is to say, not sending people to premature retirement — but still not like it could. To see that, all you have to do is look at the late 1990s. Back then, the Fed allowed unemployment to get so low that the chances someone would end up long-term unemployed averaged just 5.9 percent between 1998 and 2000. Things never got so good during the mid-2000s, and might not now either.
I know it sounds crazy when interest rates are barely positive, but the problem right now is that the Fed is too eager to hike rates. It's stuck in a loop where, as economist David Beckworth argues, it says it's getting ready to raise rates, something bad promptly happens, it decides to wait instead, things improve enough that it begins to change its mind, and then it says it's getting ready to raise rates. It's a catch-22: The economy can only handle higher rates if the Fed says it won't get them. That's because the rest of the world has zero rates, and is expected to for the foreseeable future. So, as a result, any time the Fed looks like it might raise rates, the dollar shoots up and growth slows down. Indeed, that's probably part of the reason the unemployment rate has plateaued the past eight months — and with it, perhaps, our long-term unemployment odds.
Long-term unemployment isn't a story about bad personal motivation. It's a story about bad macroeconomic luck. After all, it's not like the people who lost their jobs at the end of 2009 were three times lazier than the ones who did at the end of 2015. It was just that there were more people competing for fewer jobs back then, so much so that 30 percent of them were still looking for work six months later. And this, more than anything else, is why the government needs to do whatever it can to fight recessions. Sure, in the long run, the economy would recover on its own, but in the long run our careers are all dead — and maybe in the short run too, if long-term unemployment makes companies think we're unemployable.
The only thing we have to fear is the fear of doing too much.