Congressional Budget Office

The Rise in Long-Term Unemployment: Causes, Effects, and Policy Options

February 20, 2014

Presentation to the Winter Policy Forum of the National Association of State Workforce Agencies William J. Carrington Microeconomic Studies Division

Full reports: Understanding and Responding to Persistently High Unemployment, www.cbo.gov/publication/42989; Unemployment Insurance in the Wake of the Recent Recession, www.cbo.gov/publication/43734

C O N G R E S S I O N A L B U D G E T O F F I C E

Unemployment and Long-Term Unemployment Were Very High During and After the Recession

■ The unemployment rate rose from less than 5 percent in most of 2007 to 9.6 percent in 2010, and it has now fallen to 6.6 percent.

■ Unemployment initially rose mostly because of a large number of layoffs and plant closings in 2008 and 2009.

■ Long-term unemployment (defined as being unemployed for more than 26 consecutive weeks) rose to a historic high; during a typical month since 2010, roughly 40 percent of unemployed people have been unemployed for more than 26 weeks.

C O N G R E S S I O N A L B U D G E T O F F I C E

Unemployment Rate, 1981 to 2013

(Percentage of labor force)

0

2

4

6

8

10

12

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

C O N G R E S S I O N A L B U D G E T O F F I C E

Long-Term Unemployment Rate, 1981 to 2013

(Percentage of labor force)

0

2

4

6

8

10

12

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

All Unemployed

Unemployed for More Than 26 Weeks

C O N G R E S S I O N A L B U D G E T O F F I C E

Relationship Between the Unemployment Rate and the Long-Term Unemployed as a Share of All Unemployed, 1982 to 2011

(Long-term unemployment as a percentage of all unemployed)

0

10

20

30

40

50

0 1 2 3 4 5 6 7 8 9 10 11 12Unemployment Rate (Percent)

1982 to 2007

2008 to 2011

2008

2009

2010

1983

1982

2011

C O N G R E S S I O N A L B U D G E T O F F I C E

Employment-to-Population Ratio, 1981 to 2013

(Percent)

0

10

20

30

40

50

60

70

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

C O N G R E S S I O N A L B U D G E T O F F I C E

Employment-to-Population Ratio for Men and Women, 1981 to 2013

(Percent)

0

10

20

30

40

50

60

70

80

1981 1986 1991 1996 2001 2006 20110

10

20

30

40

50

60

70

80

1981 1986 1991 1996 2001 2006 2011

Men Women

C O N G R E S S I O N A L B U D G E T O F F I C E

Causes of High Unemployment and Long-Term Unemployment

■ Weak demand for goods and services as a result of the recession and its aftermath

■ Mismatches between the needs of employers and the skills and location of the unemployed

■ Incentives from extensions of unemployment insurance (UI) – Reduced incentives to take jobs – Increased incentives to stay in the labor force and therefore be

counted as unemployed (rather than being counted as out of the labor force)

■ Real and perceived erosion of skills and motivations of the long-term unemployed

C O N G R E S S I O N A L B U D G E T O F F I C E

Gross Domestic Product Gap, 1981 to 2024

(Percentage of potential gross domestic product)

-10

-8

-6

-4

-2

0

2

4

6

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023

C O N G R E S S I O N A L B U D G E T O F F I C E

Outlays for Unemployment Benefits, by Fiscal Year, 2000 to 2024

(Billions of dollars)

0

20

40

60

80

100

120

140

160

2000 2003 2006 2009 2012 2015 2018 2021 2024

Emergency Benefits and Federal Additional

Compensation

Regular and Extended Benefits

[Labeling corrected on March 13, 2014]

C O N G R E S S I O N A L B U D G E T O F F I C E

Consequences of High Unemployment and Long-Term Unemployment

■ Reduced earnings after job loss – Workers’ earnings would be lower for many years after job loss

■ Lower long-term earnings for workers entering the labor force during periods of high unemployment

■ Job loss is bad for health – Increased rates of depression and death

■ Some evidence that recessions are good for health in general

■ Effects on educational attainment and future earnings of workers who lose jobs

C O N G R E S S I O N A L B U D G E T O F F I C E

Policies to Reduce Unemployment

■ Fiscal policies

■ Training policies

■ Unemployment insurance

■ Job-search assistance

C O N G R E S S I O N A L B U D G E T O F F I C E

Some Fiscal Policies to Reduce Unemployment

■ Household assistance – Increased UI expenditures – More generous refundable tax credits – Reduced employees’ payroll taxes

■ Business assistance – Reduced employers’ payroll taxes – Allowing full or partial expensing of investment costs

■ Aid to state governments

C O N G R E S S I O N A L B U D G E T O F F I C E

Training Policies to Reduce Unemployment

■ General workforce programs

■ Sectoral programs – Health care – Information technology

■ Programs focused on youth – Career academies – Apprenticeship programs

■ Programs focused on displaced workers

C O N G R E S S I O N A L B U D G E T O F F I C E

Modifying UI Policy to Reduce Unemployment

■ Extend the duration of UI benefits

■ Offer reemployment bonuses

■ Establish personal reemployment accounts

■ Offer short-time compensation

■ Target services

■ Use UI benefits to temporarily place the unemployed in jobs with private-sector employers

■ Offer wage/earnings insurance

C O N G R E S S I O N A L B U D G E T O F F I C E

Assistance to Unemployed Workers

■ Increased job-search assistance

■ Skill certification programs

■ Housing mobility assistance