The Best Way to Prevent Long-Term Unemployment is to Stop Subsidizing It

Apr 10, 2014 by AFP

By Eric Peterson

The Obama economy has been hard on the American worker, particularly those who have slipped into the ranks of the long-term unemployed. These long-term jobless, defined as being unemployed for over 27 weeks, face an especially steep climb as they seek to reenter the workforce.

Employers are often leery about hiring those who have been out of work for extended periods of time, viewing them as risky prospects with diminished skills. Long-term unemployment also presents a challenge for policymakers, who have backed generous extensions of unemployment benefits that actually exacerbate the problem of chronic joblessness.

Over the last few years, America has faced some of the highest unemployment rates in decades.  While unemployment rates have leveled off somewhat despite slow economic growth, in large part due to individuals dropping out of the labor market, the long-term unemployment rate has continued to remain stubbornly high.  The previous post-war high for long term unemployment was 2.5 percent in 1981-82. By comparison, the lowest the long term unemployment rate has fallen since 2008 is 2.5 percent. A staggering 3.8 million Americans now find themselves among the ranks of the long-term unemployed making up a third of the total number of unemployed.  Worse, the labor participation rate has fallen to its lowest point in more than three decades.

A new study shows the difficulty for the long term unemployed to find and maintain fulltime employment. From 2008-12 only 36 percent of those surveyed were able to find work when asked about their employment status 15 months later. Of the remainder, 30 percent were continuing to look for work while 34 percent had dropped out of the work force completely. While these numbers are staggering enough, less than one third of those who found employment worked full time for over 4 months. Moreover, another 7.4 million workers are classified as involuntary part-time workers – people whose hours have been cut back or who are unable to find full-time employment.

The extended length of unemployment insurance is a major cause of increased long term unemployment. A study from Princeton University shows that 10 weeks before unemployment benefits are set to end; time spent searching for work more than triples.  Extending unemployment benefits beyond 27 weeks has proven disastrous. Many individuals don’t begin vigorously searching for employment until after employers begin to view their skills as diminished. The same study also shows generous benefits paid by unemployment insurance raises individuals “reserve wage” making them less likely to accept a lower paying position, again increasing the length of an individual’s unemployment. Recent data suggests that the recent March uptick in the labor force participation rate was due to states returning unemployment benefits to the pre-recession length of 26 weeks. The results are clear, long and generous unemployment benefits discourage finding employment

Unfortunately, rather than seeking ways to reduce tax and regulatory barriers that prevent businesses from expanding and hiring additional workers, Congress is currently debating on whether to again extend unemployment insurance. And while some see this as a compassionate short-term step on the part of policymakers, doing so would likely serve to expand the ranks of the long-term unemployed.

At the same time, lawmakers in Washington are considering mandating a hike in the minimum wage to $10.10 per hour. This will likely prove even more disastrous for the long term unemployed. Making potential workers more expensive to hire will lead to fewer employers willing to take risks on those who are perceived to possess diminished skills. Moreover, it is likely to expand the growing number of involuntary part-time workers, as businesses seek to cope with inflated labor costs by reducing the hours of full-time workers.

Rather than continuing to subsidize unemployment, lawmakers should pursue policies that make it easier for businesses to grow.  At the very least, Congress should stop providing disincentives to the unemployed to search for work and increasing costs for employers to hire them. In short, America is stronger when those who want to participate in the economy can.