04.08.10

The Dirty Secret of Unemployment

Neither Democrats nor Republicans want to admit it, but it's becoming easier to live on unemployment than ever. Reihan Salam on why a spike in two-income families and a surge of federal support is skewing the numbers.

Even after a strong jobs report in March, the unemployment rate has remained stuck at 9.7 percent. And as a new study from the Pew Fiscal Analysis Initiative has found, 44 percent of unemployed Americans have been unemployed for at least six months. During the devastating recession of the early 1980s, in contrast, the long-term unemployed were only 26 percent of the total. Remarkably, the number of unemployed Americans who've been out of work for a year or longer is 23 percent. Naturally, Republicans will try to lay the blame for staggeringly high levels of unemployment on the White House. Democrats will argue that various stimulus efforts, from cash for clunkers to aid to states, kept the unemployment picture from getting much worse. But both parties ignore the obvious and politically inconvenient truth: unemployment is higher in no small part because unemployment is more pleasant than it used to be.

Is it the president's fault that Americans are better off than they were 30 years ago, and are thus not desperate to take whatever job that comes along?

For most of us, particularly those of us who've either endured or seen a loved one endure a spell of unemployment, the idea that joblessness is some kind of walk in the park seems faintly perverse if not completely infuriating. But without trivializing the psychic trauma involved, there's no getting around the fact that it is in many respects much easier to be unemployed now than it was in the Reagan-Volcker era. And if that's true, "blaming" President Obama for a high unemployment rate seems faintly absurd. Is it the president's fault that Americans are better off than they were 30 years ago, and are thus not desperate to take whatever job that comes along?

In 2010, there are far more two-earner households than there were in 1981, which means that many households now have an added economic cushion to help withstand the impact of a job loss. As labor economist Stephen Rose has noted, a husband-and-wife couple between the age of 25 and 62 has a median income of $70,000. If both spouses work at least part of the time, the median income goes to $81,000, an amount that allows for a comfortable standard of living in most U.S. metropolitan areas. An income shock that cuts that number in half or two-thirds would represent a significant blow to a family's economic prospects. But it's a far less serious blow than an income shock that cut the number down to zero.

Moreover, the welfare state is far more generous. Between 1981 and 2007, per capita spending on the federal welfare state increased by 77 percent, adjusted for inflation. Unemployment insurance has grown more generous. Over the last five years, the Pew study notes that unemployment insurance spending has gone from $33 billion to $168 billion. Half of that $168 billion in FY 2010 has gone to the long-term unemployed. This further helps cushion the blow, and it can allow an unemployed person to be somewhat choosier about her next job. While it's certainly true that many workers have taken jobs that involve huge salary cuts, many others are holding out hope for a job that matches expectations in a sunnier labor market. This isn't necessarily a bad thing for society. One can imagine workers using an extended spell of unemployment as an opportunity to gain new skills and to spend time with loved ones.

Simply put, unemployment benefits increase unemployment durations. There is some controversy as to why this is true, but there's no getting around it. According to Michael Feroli, an economist at JP Morgan Chase, the extension of unemployment benefits has increased the measured unemployment rate by 1.5 percent.

To be sure, many economists, including well-regarded Harvard labor economist Lawrence Katz, believe that the scarcity of jobs is so severe that the incentive problem posed by extending unemployment benefits is outweighed by the quick fiscal stimulus it provides. The implicit view is that low demand is the most pressing problem faced by the economy, and not low supply.

Casey Mulligan, a University of Chicago economist with a contrarian bent, has argued that U.S. economic woes stem from a supply problem and not a demand problem. That is, when people have good alternatives to working, they'll take them and in the process lower overall output. In a highly entertaining series of posts, Mulligan keeps a long-running list of employment-reducing policies that the Obama and Bush administrations have embraced, including a wide range of means-tested programs for student loans, mortgages, and health insurance premiums, minimum wage increases, and tax increases. The means-testing of social programs essentially raises marginal taxes on poor families as they climb the economic ladder: the more you earn, the more benefits you lose. If a married couple is getting a big break on mortgage payments only if its income falls below a certain level, there is a strong incentive to keep a potential second earner in reserve.

While Mulligan's perspective fingers government as a major culprit in persistently high unemployment rates, you won't hear Republican candidates enthusiastically embracing his ideas, not least because many of the policies on his list are popular. Rather than focus on the damage done by means-tested student loan modification and mortgage modification, they will most likely focus on the threat of higher taxes. We're thus as far as ever from an honest debate about unemployment.

Reihan Salam is a policy advisor at e21 and a fellow at the New America Foundation.