Long-Term Unemployment

I have little to add to Becker's persuasive analysis.

Among the many reasons to regard the current economic situation as dire is the high incidence of long-term unemployment. More than 40 percent of the unemployed have been unemployed for more than six months, and there are reasons to expect long-term unemployment to remain at or near its present level (or even rise) for some time to come. One reason is shifts in consumption. If consumption patterns remain unchanged throughout a downturn, or if the downturn is so short that when it's over consumers resume their previous consumption pattern, then most of the unemployed can expect to be rehired in their old jobs, for which they are trained and in which they may have firm-specific human capital, making them more valuable to their old employer than they would be to a new one. But if the downturn is protracted and consumers as a result make durable changes in consumption, many old jobs will disappear ("job destruction," economists call this phenomenon).

The longer the downturn, moreover, the more young people will be competing for jobs when it ends, and this make it difficult for the long-term unemployed to find jobs. It is hard for older workers to compete with younger ones for new jobs in which the older workers have no specific human capital. Other things being equal, employers generally prefer younger workers because they have less interest in unions (younger workers are less likely to remain in the same job, and unions therefore cater to older workers) and lower salary expectations, and are healthier and so do not cost as much in health benefits as older workers do (not that all employers offer health benefits, of course).

Older workers are more likely, moreover, to own their home and to have ties to their community. With house prices severely depressed, homeowners are reluctant to sell because there is not enough equity in their house to enable them to buy another house. This makes them all the more reluctant to search for a job in a different community.

The longer a worker is out of work, the less likely he is to get another job comparable to the one he held. This is not only because skills atrophy if unused, and the worker ages during his period of unemployment, but also because employers may take the worker's long layoff as evidence that he lacks commitment to working or that other prospective employers found something lacking in him, which is why he has gone so long without finding another job.

The long-term unemployed exert political pressure for extension of unemployment benefits, and their plight—they are likely to have used up their savings—triggers an altruistic response that makes their political pressure more effect. But unemployment benefits delay re-employment by reducing the cost of search for a new job. And the cost of unemployment benefits contributes significantly to our soaring federal deficits—unemployment benefits are expected to cost the government about $250 billion this year.

What can be done about the problem of long-term unemployment? Nothing that is politically feasible. A job-subsidy bill is wending its way through Congress. It is hard to see how it can have any effect. Apart from the reason Becker gives, a job subsidy is likely to have a very indirect and limited effect on demand for goods and services, and without an increase in demand firms have no incentive to add workers even if a new worker's wage is subsidized. Suppose a firm is producing 1,000 units of output a year with a work force of 30, and it adds a 31st employee and thereby qualifies for a $5,000 tax credit. The firm's total costs will have risen by the wages and benefits that he pays the new employee minus $5,000, unless the new, cheaper worker enables the firm to obtain a greater saving because the worker substitutes for some capital input. Unless that happens, then because the firm's sales will not have risen, the firm's participating in the job-subsidy program will reduce its profits (revenue minus cost).

The only solution to the problem of long-term unemployment that would not impair the operation of the labor market would be, as Becker points out, rapid economic growth, which would increase the demand for labor by more than the annual increase in the number of persons in the labor force. But it does not appear that any significant measures to accelerate economic growth are politically feasible. Measures that might be effective, such as reforming the immigration laws, reforming the tax laws, reducing the power of unions, reducing the minimum wage, eliminating agricultural subsidies, fighting protectionism, and reducing government subsidies of pensions and health care, are off the political radar screen for now and the foreseeable future.