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James Surowiecki: Congress and Long-Term Unemployment

James Surowiecki:

Congress and Long-Term Unemployment: The talk in Washington these days is all about budget deficits, tax rates, and the “fiscal crisis” that supposedly looms in our near future. But this chatter has eclipsed a much more pressing crisis here and now: almost thirteen million Americans are still unemployed…. [T]he percentage of working adult Americans is as low as it’s been in almost thirty years….

Forty per cent of the unemployed have been without a job for six months or more…. Being unemployed is even more disastrous for individuals than you’d expect…. Till von Wachter and Daniel Sullivan found that among experienced male workers who lost their jobs during the 1981-82 recession mortality rates soared in the year after the layoffs. And the effects of unemployment linger. Many studies have shown that the lifetime earnings of workers who become unemployed during a recession are permanently reduced, and von Wachter and Sullivan found that mortality rates among laid-off workers were much higher than average even twenty years afterward….

Most worrying, if high unemployment persists it could start to feed upon itself… if high long-term unemployment continues there’s a danger that, sooner or later, cyclical unemployment could become structural unemployment—that is, unemployment that won’t go away once the good times return. The longer people are unemployed, the harder it is for them to find a job (even after you control for skills, education, and so on). Being out of a job can erode people’s confidence and their sense of possibility; and employers, often unfairly, tend to take long-term unemployment as a signal that something is wrong. A more insidious factor is that long-term unemployment can start to erode job skills, making people less employable. One extraordinary study of Swedish workers, for instance, found that there was a strong correlation between time out of work and declining skills: workers who had been out of work for a year saw their relative ability to do something as simple as process and use printed information drop….

The phenomenon in which a sizable chunk of the workforce gets stuck in place, and in effect becomes permanently unemployed, is known by economists as hysteresis in the job market. This is, arguably, what happened to many European countries in the nineteen-eighties…. If the ranks of America’s long-term jobless don’t start shrinking soon, it’s less likely that they ever will, and we’ll be looking at a new “natural” unemployment rate for the U.S. economy….

You’d think that Congress and the Federal Reserve would be straining every sinew to avoid such a fate…