A titanic struggle to decide whether the jobless should get money for longer

Jul 22nd 2010 | Washington, dc

 

THE news is not yet official, but America’s recession probably ended in June last year. Americans could be forgiven for failing to notice. Nearly 15m remain out of work, close to the peak that followed the recession. This summer, Congress has been busy rubbing salt in their wounds. Some 2.5m unemployed lost access to their benefits when the Senate failed to extend the government’s programme of emergency unemployment assistance in early June. This week the swearing-in of a successor to Robert Byrd, the veteran senator who died last month, delivered to Democrats the extra vote they needed to break a Republican filibuster, and the extension passed at last. But the episode is a glaring reminder of the crisis in America’s labour markets.

Congress had never before failed to extend benefits when unemployment remained above 7.2%, and this week’s action marked the seventh extension in this recession. But passage has become steadily more difficult. In February Senator Jim Bunning, Republican of Kentucky, held up an extension vote before giving ground under pressure from colleagues fearful of bad press. This time, Republicans were nearly united in their opposition. Only the defection of two liberal-minded colleagues, Olympia Snowe and Susan Collins of Maine, allowed the measure to move forward. But the delaying tactics were not entirely unsuccessful. The $34 billion extension bill was all that remained of a hoped-for mini-stimulus package, which included aid to states and business tax credits totalling $120 billion.

Republicans will have a chance to attack unemployment benefits again. The new extension will last only until the end of November, while unemployment is projected to stay above 7% into 2012. The battle over long-term help for jobless workers is far from over.

There are two main reasons why Republicans oppose extending benefits: because the country cannot afford it, and because benefits, they believe, have given the unemployed an incentive to stay out of work. Neither reason is well founded. The bill’s price tag, at $34 billion, is small—equal to just 2.5% of this year’s deficit forecast. With the American economy still convalescent, weak demand remains a bigger threat to recovery than indebtedness. Meanwhile, federal stimulus spending is on the wane and will become a net drag on output in the second half of this year. A bit more borrowing will help cushion the withdrawal.

Unemployment benefits may also be the government’s thriftiest option. When they exhaust unemployment assistance, many workers apply for Social Security Disability Insurance (SSDI)—a programme from which they are unlikely to return to the labour force. The lifetime cost of disability benefits is significant. By recent estimates, a shift of just 200,000 unemployed workers to SSDI could entail an increase in government lifetime costs of up to $24 billion. If unemployment benefits keep those people in the labour force, the savings could be substantial.

Nor have long-term benefits played much of a role in keeping unemployment high, as Republicans claim. A recent study of their effect, by economists at the San Francisco Federal Reserve Bank, pegged their contribution at just 0.4 percentage points of the close-to-10% jobless rate.

The main driver of joblessness remains the difficulty of finding work. A year into recovery, there are still nearly five workers for every new job opening. Such intense competition reduces the odds that a given worker will be hired and increases the length of time he will expect to be out of a job. Extended jobless payments will not be available everywhere, but only in states where the unemployment rate remains over 8%. That in itself will help with the problem of malingerers.

But if the extended assistance is not in itself problematic, it is nonetheless a reminder that something is deeply amiss in American labour markets. A year into recovery, job growth has been halting and alarmingly slow. In the year that followed the end of the 1981-82 recession, when the unemployment rate last exceeded 10%, 3.6m jobs were added. In June of this year, by contrast, employment remained below the level at the estimated end of the recession, one year before.

The length of the downturn (the longest since the Depression) and the weakness of the recovery have combined to generate an unprecedented rise in the rate of long-term unemployment. Nearly half of the country’s unemployed workers have been off the job for 27 weeks or more, and the average duration of unemployment has risen to over 35 weeks. In the best of circumstances, long-term unemployed workers struggle to find new jobs. Given the slow present pace of recovery, America risks the creation of a class of the structurally unemployed.

America’s present labour market policies cannot deal with this. A simple system of unemployment benefits served the country fairly well in the past. A flexible, resilient jobs market quickly absorbed idle labour, preventing the sustained detachment from the labour force that afflicted European economies in the 1970s and 1980s. But the system has been overwhelmed by current unemployment, and is ill-equipped for the job of putting the long-term unemployed back to work. To avoid repeating the European experience, America will need to adjust its strategy.

Finding an effective approach will be a challenge. Insufficient demand and slow job creation remain big problems. But new data also show that job openings are not supporting the expected level of new hires. Structural barriers to full employment may be to blame. Many displaced workers have obsolete skills. Others are locked in moribund job markets because their houses are unsellable, worth less than the mortgage loans they must repay.

The record of programmes designed to put the long-term unemployed back to work is also somewhat mixed. Job search and matching assistance would typically be the quickest way to cut the number of jobless, but not when the economy is as weak as it is now. Retraining workers, particularly in technical fields, can be effective, but the benefits accrue slowly over time. Job-finding bonuses may pep up motivation among the long-term unemployed, and could encourage them to move to places with more jobs.

Sadly, no quick fix is available. But the failure to change tack may prove costly, leading to slower growth and larger fiscal burdens. When Congress takes up the question of benefits again in November, it should bear this in mind: a failure to deal promptly with long-term unemployment will ensure that unemployment becomes a long-term problem.

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