Princeton University professor Alan Krueger dives deep into the problem of long-term unemployment in a paper presented Thursday at the Brookings Institution.
He calls people out of a job for six months or more an “unlucky subset of the unemployed” who exist on the margins of the economy — with faint hope of returning to productivity.
Here are five takeaways from his paper, co-authored with Judd Cramer and David Cho of Princeton:
1Long-term unemployment has little impact on inflation.
One of the many questions arising from the Great Recession perplexing economists is why inflation has not fallen even further than it has.
Conventional economic theory calls for a decline averaging 1 percentage point a year from 2009-13, when the unemployment rate averaged 8.7 percent. Instead, inflation declined by an average of just 0.2 percentage points.
Krueger’s paper builds on previous work suggesting the reason is because many of the unemployed have been out of work so long they no longer exert much pressure on wages, and, hence, inflation.
Instead, it’s the short-term unemployment rate that correlates most closely to changes in pay and prices.
2The long-term unemployed have a hard time not only finding a job, but also keeping one.
The paper uses data from the Current Population Survey to track what happens to the long-term unemployed during a period of 16 months.
It found only about a quarter of people were hired within a few months of the survey. Of those, about 35 percent were unemployed again or left the labor force within a year.
Overall, only about 11 percent of the long-term unemployed were in steady, full-time work after 16 months.
3Long-term unemployed who leave the labor force are unlikely to come back.
About one in 10 of the long-term jobless left the workforce altogether within a few months of the survey, and most of them stayed out of the labor market after a year.
The paper notes the most common reason for leaving is they no longer wanted a job, suggesting the decision is permanent.
4The long-term unemployed stay in their field.
Krueger analyzed the short-term and long-term jobless who were rehired in 2012 and the industries in which they found work. His finding: There was no sign the long-term unemployed will make a big career switch.
Despite discussion about retraining workers for jobs in fast-growing industries such as health care, they tend to find employment in the fields they know best.
5A stronger economy does not hurt — but it does not help much, either.
The paper hones in on how the long-term unemployed have fared in the 13 states with the lowest jobless rates as of last fall: Hawaii, Kansas, Minnesota, Montana, Nebraska, New Hampshire, North Dakota, Oklahoma, South Dakota, Utah, Vermont, Virginia and Wyoming.
The average unemployment rate in those states was 4.3 percent, compared with the national rate of 7 percent.
Yet, even the states with strong labor markets suffered a sharp rise in long-term unemployment. And the difference in the probability of finding a job since the recession ended is only slightly better in strong markets than in weak ones.
“Overall, there is little evidence in this comparison to suggest that the long-term unemployed fare substantially better in the states with the lowest unemployment rates, consistent with the idea that the long-term unemployed are on the margins of the labor force, even where the economy is stronger,” the paper said.
So now what?
The stubbornly high rate of long-term unemployment is a reason some officials at the Federal Reserve cited for keeping interest rates near zero.
Some even argued the Fed should keep rates low even after the unemployment rate returns to more acceptable levels in hopes of drawing people who left the labor force back in.
But Krueger’s paper seems to suggest there is little more the Fed can do to help those workers — and it risks stoking inflation if short-term unemployment falls too far in the process.
In the paper, Krueger deftly dodges those issues directly, befitting someone who until last year was the chief economist at the White House.
He merely points to the need for a “broad array of policies” to tackle the problem of long-term unemployment.
The responsibility, he says, falls on all of us and “will likely require a concerted effort by policy makers, social organizations, communities and families, in addition to appropriate monetary policy.”