The High Unemployment Rate and its Social Cost-Becker | E-Axes

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The High Unemployment Rate and its Social Cost-Becker

From the Becker-Posner blog by Gary Becker:

The Bureau of Labor Statistics (BLS) on Friday released its report on employment and unemployment in October. Although greeted by most of the media as signaling pretty good news, it is “good” only in the sense that the labor market did not get any worse. Employment and unemployment remain very far from full employment levels fully 4 years after the financial crisis erupted in September 2008, and 3 years after the Great Recession officially ended (as defined by the NBER). In fact, this is the slowest recovery from a recession during the past half century in both employment and unemployment.

The unemployment rate remains stuck at slightly below 8%, and about 12 million men and women remain unemployed. Over 8.3 million persons still are employed part time because their hours were cut or they could not find a full-time job. Another 2.4 million persons are only marginally attached to the labor force, but are not counted as unemployed because they had not searched for work in the four weeks prior to the survey.

 The major explanation for the very sluggish labor market is the slow recovery of GDP from the depths of the recession. When GDP is growing slowly-this growth has averaged about 2% during past 8 quarters- one can hardly expect employment to be growing rapidly or unemployment to be receding at a fast pace. In fact, the relation between GDP growth in the recovery from a recession and and the decline in unemployment is called Okun’s Law, named after the economist Arthur Okun who discovered this empirical regularity. One version of this law states that there is a 1% percentage point decrease in the unemployment rate for every 2% increase in GDP away from recession levels.

This law is far from exact, but it does bring out in a simple way that unemployment is unlikely to be decreasing rapidly from recession levels if GDP is recovering slowly. Okun’s Law was not operating in the early stages of the Great Recession because workers were being laid off at much faster rates relative to the decline in GDP than would be predicted by this Law. However, the connection between the recovery in unemployment and the growth in GDP during the past couple of years has been more in line with Okun’s observations (I am indebted to discussions with Edward Lazear on these issues).

 The extension of unemployment benefits to 99 weeks, or almost 2 years, is a public policy change that has raised the unemployment rate (see Casey Mulligan’s recent book, The Redistribution Recession). When the government is helping to support unemployed persons for up to 99 weeks, some of the long-term unemployed will look less diligently for work.

 This brings us to the most disturbing aspect of the high unemployment rate during the past 4 years; namely, the large number of the unemployed who have been out of work for at least 6 months. Last month 5 million men and women had been unemployed for at least 6 months, and they comprise about 40% of all the unemployed. This fraction has been stuck at a little over 40 percent since the first quarter of 2010. Moreover, a truer picture of the extent of long-term unemployment requires the inclusion also of most of the 2.4 million individuals who have given up looking for work.

During past recessions, the U.S. typically has had relatively low rates of long-term unemployment, especially in comparison to most Western European countries. But that is no longer the case. American long-term unemployment has been so high during past few years partly because of the extension of unemployment compensation to 99 weeks, and partly because of the slowness of the recovery during this recession compared to previous recessions. Another contributor is the decline in sectors, such as parts of manufacturing, which will never recover fully. Since workers who invested a lot of their human capital in declining sectors would have to take a big hit in earnings if they take jobs in most other sectors, they may continue to look for jobs in sectors where their human capital is more valuable.

Long-term unemployment creates several long run social costs in addition to the psychological and other damage from being unemployed for many months. Some of the long-term unemployed become discouraged and leave the labor force prematurely rather than continuing to look for the work that has eluded them for many months. This is especially likely for the older unemployed since they take much longer to find jobs. In addition, younger workers who have been unemployed for a long time and are not highly skilled may retire from the regular labor force to enter the informal labor market where they are only sporadically employed. Food stamps and other benefits help them supplement their occasional earnings from jobs.


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