The composition of unemployment into short- and long-term

This is not new news, but Peter Coy frames it quite memorably:

The rate of short-term unemployment—six months or less—is almost back to normal. In January it was 4.9 percent of the labor force. That’s only 0.7 percentage point above its 2001-07 average. But the rate of long-term unemployment, 3 percent in January, is precisely triple its 2001-07 average, according to a Bloomberg Businessweek calculation based on Bureau of Labor Statistics data. (Those two rates—4.9 percent and 3 percent—add up to the overall unemployment rate of 7.9 percent.) A striking statistic: The long-term unemployed make up 38 percent of all workers without jobs, double the average share and just a few notches down from the 2010-11 peak of 45 percent.

That is another way to think about why rapid labor market improvement appears unlikely.


This fact seems squarely at odds with the hypothesis of an aggregate demand shortfall. An AD shortfall should elevate short-term unemployment more than long-term unemployment. If the problem is sticky nominal wages, then workers should eventually return to work and accept their new lower nominal wage given enough time. The presence of a subset permanently unemployable suggests the problem is a real shock to the economy, whereby some workers are heavily displaced, but most have little displacement.

Isn't it the opposite???

A long term unemployed person loses skills in the marketplace, is viewed as less desirable, etc.. That would be why you would want to stimulate early and decisively to increase AD so you don't have the problems of the long term unemployed later. The fact that they are less employable later has a lot to do with the carryover of the problems of having insufficient AD at an earlier stage.

I think there is even a Nobel Lauereate who wrote something about this, but I don't think he's on the Fed.

Exactly. If we just kept building houses, we'd be in much better shape now.

Seriously, Bill, the top-down worldview just assumes these people sit around and watch skills atrophy. Unemployment is a signal to the unemployed that maybe they need to think about developing different skills. If you were unemployed for three years- let's say you worked in a record shop- would you just be sitting on your butt waiting for the record business to revive?

I'm sure you can find thousands upon of thousands of stories about people who have reinvented themselves in response to this situation, tho it's really hard to see all this micro stuff from the commanding heights. Providing 99 weeks of UI- great for your beloved AD in the short run, but it blunts this signal and indulges the atrophy. It just does. I'm not saying UI is necessarily bad, but you gotta take the good with the bad with these policies.

People want to blame capitalism's hard edges here, but it's really life's hard edges that is the problem.

So what do we do when entire industries are shedding jobs and new ones are not emerging to take up the slack?

Ride it out?

Wait wait wait...before you accuse me of being Andrew Mellon, let me hasten to add that this is not the 1930s and this country has a host of countercyclical stabilization policies that we spend a fortune on. Again, I'm not against UI, I just wish people would acknowledge that the positive macro effects come with negative micro effects.

Also, the private sector has created 5.3 million jobs since the February 2010 trough, so I'm not sure your description of the situation is apt.

Also, perhaps we think about an environment that is conducive to job creators, entrepreneurs, succeeding. Top-down solutions, make work, etc., are, IMO, inimical to this process.

The government should step in and be the employer of last resort, eg. conscript them. Not saying it will happen, but an easy way to jumpstart someone back into the general labor force.

If you want to minimize the harm of UI, maybe the best approach is much more aggressive macro management. Let's say that the fed instead of debating between a 0.25 and 0.5 point cut in Dec of 2007 had announced a 1 point cut. Or in fall of 2008 when the bottom started falling out, announced QE infinity after cutting rates to zero. And maybe congress passed a payroll tax credit that was bigger and done it faster.

It's not apparent to me how much harm there really is in UI (though I can see the problems of extending it past 52 weeks or so), but if you want to shorten UI, you probably have to insure that recessions are much shorter lived. I believe this is theoretically possible (something like what Scott Sumner believes), but I'm not sure our institutions can actually deliver.

Shorter TC: After expressing "skepticism" about increasing AD for years, once the lack of AD finally translates into hysteresis, I get to say "you can't do anything and I was right!"

In other similarly new 'news,' I look forward to the MR series about "another string of good news for Obamacare"

I wonder what proportion of the long-term unemployment really want to find work. After all, we have very generous "long-term" unemployment insurance, food stamps for more people than ever before, and wide medicaid availability. We may be seeing a difference in the way people respond to the incentives not to work. (Btw, use of the term "hysteresis" makes it seem as if some mechanistic causal trap has taken hold so as to absolve the agents of any agency or responsibility.)

the good ol' "the poor are lazy and deserve a good kick in the butt"...

As it happens, the USA has the highest proportion of poor in the OECD and the highest proportion of working poor. But don't let facts deter you.

See my comments on point 2 in this blogpost:

"the good ol’ “the poor are lazy and deserve a good kick in the butt”…"

Straw man post.

I'm sorry I phrased that poorly. It should have been:

The good ol' straw man post.

It makes sense to speak about agency and responsibility, but not much sense to talk about whether or not someone really "wants" to find work. There are a minority of folks who would take the most menial job imaginable rather than go on the dole and a minority of folks who seem allergic to a day's work. Most people fall somewhere in the middle, that is to to say, they respond to incentives.

It would have been interesting had he interviewed Ms. Hall, regarding what she does for income when she is not working. The long-term unemployed are still alive; what are they doing for funds?
I have to question the efficacy of sending resumes out to test the effect of long term unemployment on job prospects. My understanding is that employers get too many resumes to make it useful for finding candidates. My firm finds many of its new employees (and it is continually hiring) through referrals from existing employees. Sitting at your computer filing out online applications is largely a waste of time. Networking is still the most effective way to find a job.

Only if you have a good network.

I've had success from leveraging recruiters, and I've gotten tons of responses from simply sending out resumes. However, that may be because I'm more high-skill, low-connection in my work habits. People I know who aren't themselves recruiters--I've found temp jobs, but that's about it.

How does this compare to other post-recessionary periods?

A good question. I know in general that this has been an atypically bad post-recessionary period, but I haven't seen any comparisons on how bad for quite some time. I can't imagine the last 6 months of data (particularly the fourth quarter contraction) have made it better.

Our we clearly in the worst post recessionary period since the Great Depression? Are we in the second worst period since the 1880's or further back?

TC, Is there an upgrade of this software to support a user edit function?

This is mostly structural unemployment and partly frictional.

We had too many labor resources devoted to the production of long lived assets, and they have now been displaced from the market for a very long time. They are unsuited to work in growing industries.

The frictional unemployment comes from geographic anchoring, wage rigidity, and subsidized leisure.

Of course PK thinks we didn't throw enough trillions of OPM at the problem. Those are the ramblings of a man who never had to sweat for a job in his adult life and never applied for unemployment. It's also the delusion that the macroeconomic is some grand machine that can be driven without regard to the trillions of independent parts that all have their own ideas of where to go. People are just cattle to PK who need to be driven where he wants them to go.

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