The Truth Behind Today’s Long-term Unemployment Crisis and Solutions to Address It

http://www.epi.org/publication/truth-todays-long-term-unemployment-crisis/

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I am now going to talk about what we should do about this. My role here is to identify what economic analysis tells us should be done, not what is necessarily politically feasible. Given that demand is the problem, we should be:

Passing extended benefits again to help the long-term unemployed, who are the ones who have been the hardest hit by the lasting effects of the Great Recession,

Undertaking other measures that also stimulate aggregate demand, and

Enacting policies that spread total hours worked across more workers.

Taking these in turn:

Extended UI benefits would do the obvious thing of providing a lifeline to those workers and their families who have suffered the blow of job loss when the labor market is historically weak. Some have argued that extended benefits could actually make the labor market weaker by giving laid-off workers an incentive not to return to work. The empirical evidence strongly rejects this concern.

The most rigorous papers on this show that there is almost no delay in returning to work—for example a paper by Henry Farber of Princeton and Rob Valletta of the San Francisco Fed show that UI extensions in the Great Recession increased the time it took UI recipients to take another job by three percent. Further, a slight increase in search-time is actually a benefit of UI—the point is to give liquidity-constrained unemployed workers a little space to find a job-match that will provide durable benefits to both them and potential employers. For example, it may not be optimal for either workers or employers for people with young kids to be forced to take the first job available even if it comes with a two hour commute, as they will likely quit when as soon as a more convenient job becomes available.

Besides not hindering job-search, UI extensions also stimulate the macroeconomy and this stimulus generates jobs. A wealth of macroeconomic studies confirm that spending on UI extensions is one of the most effective mechanisms available for injecting money into the economy, since the long-term unemployed are, almost by definition, cash strapped and very likely to immediately spend their UI benefits. This spending creates demand for goods and services, and who provides goods and services? Workers. Thus, it generates jobs. We estimate that if we allow UI extensions to lapse for all of 2014, it will cost the U.S. economy about 300,000 jobs by the end of the year.