High Unemployment After the Great Recession: Why? What Can We Do?

In May 2010, a record 46 percent of the unemployed were counted by the Bureau of Labor Statistics as long-term unemployed — defined as durations of six months or more. Those who were unemployed for more than a year, whom I shall call the very-long-term unemployed, numbered 23 percent of all the unemployed. These are unprecedented figures.

We know that long-term unemployment and very long-term unemployment generate serious and long-lasting harm to millions of individuals and to the economy. The scarring effects upon the economic, mental and physical health of long-term unemployed workers and their families are well-documented (von Wachter 2010). We also know that many of the very long-term unemployed eventually leave the labor force permanently, and some of those end up on the disability rolls. Very-long-term unemployment consequently generates adverse effects upon the Treasury and upon the capacity of the economy to grow in the long-run.

In the past two years the proportion of the unemployed who have been out of work six months or longer has grown to levels not seen since the Great Depression (Chart 1). At first, the growth of the long term unemployed seemed to be a function of the surprisingly rapid and extended increase in the overall unemployment rate, which rose from 4.7 percent in November 2007, when the recession began and peaked at 10.1 percent in October 2009. As has been true in previous recessions, the long-term unemployment rate grew at about the same rate as the growth in the unemployment rate (Chart 1).

In the recovery phase that began in April or May of 2009, what went up quickly has not come down very much. Since its cyclical peak of 10.1 percent in October 2009, the overall unemployment rate fell to 9.7 percent in January 2010 and remained at 9.7 percent in May 2010. But in the same period, the long-term unemployment rate has continued to skyrocket as rapidly as during the recession phase. By May 2010, the proportion of the unemployed with jobless durations of six months or more had reached 46.0 percent (Chart 2). By comparison, in the 1957-58 recession, this proportion peaked at about 10 percent; in 1982-83, it peaked at about 26 percent.

The continuing growth of long-term and very-long-term unemployment well into the economic recovery, and in the face of repeated extensions of emergency benefits– up to 99 weeks in some states, pose important questions for employment policy. Some of these involve immediate policy issues: Have the repeated benefit extensions themselves kept very-long-term unemployed workers from searching for and accepting job offers? Will the economic recovery eventually reduce the number of very-long-term unemployed without further interventions? I address these questions briefly in this paper, as excellent summaries of research on these questions are already available.

I then turn to less-studied issues concerning changes in labor market dynamics. These call for longer term policy responses. Why did unemployment grow more than forecast? Is the continuing growth of long-term unemployment the result of cyclical or structural causes? Following each section, I recommend specific policy changes that would reduce the ranks of the unemployed and that would improve the workings of our labor market. Most of these proposals do not add big-ticket items to the Federal budget, so their merits can be considered independently of the question of how large the federal deficit should be at this time.