Asymmetrical Information - Megan McArdle

04.22.13

America's Jobless Crisis

It's the most important issue facing America today. What can we do?

Paul Krugman takes to the New York Times op-ed page today to discuss America's greatest crisis: the long-term unemployed.  It's a topic that yours truly has been banging on about for quite a while.  But it's gotten a bit of new urgency from the paper that Paul Krugman cites in his column.  

But first, a little background. Basically, the normal relationship between unemployment and job vacancies seems to have broken down for the long-term unemployed.  As hiring has ticked up, the short-term unemployed are doing fine, but the long-term unemployed are not re-entering the labor force at the rates that we'd like to see.  They are suffering from what economists call "unemployment scarring": their time out of work has made them less employable.  

You know why unemployment is under 8% today?  Because a whole bunch of people have just given up and dropped out of the labor force.  They've decided that it's no use looking because no one will hire them.

But is this because employers are discriminating, or because they're somehow different from those who have only been out of work a short time?  Economist Rand Gayad decided to do a test.  He sent out 4800 fictitious resumes, which differed by length of unemployment, experience, and number of times they'd switched jobs.  What he found was that the long-term unemployed were less likely to get called for an interview than people with less experience, but a shorter duration of unemployment.  

The economics journalist in me is pleased with the elegance of the experiment.  The human being in me is dismayed at the humanitarian disaster underway in our labor markets.  No, I'm serious.  Short of death or a debilitating terminal disease, long-term unemployment is about the worst thing that can happen to you in the modern world.  It's economically awful, socially terrible, and a horrifying blow to your self-esteem and happiness.  It cuts you off from the mass of your peers and puts stress on your family, making it likely that further awful things, like divorce or suicide, will be in your near future.  When millions and millions of people are stuck in this debilitating trap, we should be sounding forth the alarm.  

Unlike Paul Krugman, however, I'm not entirely sure what the policy response should be.  Yes, yes, I know: stimulus!  But it took the stimulus of World War II--which included sending several million young men to far places where foreigners shot at them--to end the labor scarring of the Great Depression.  We don't know that anything short of that would pull people out into the labor force; employers might rather outsource, or compete up the wages of the employed.  And it seems to me that we are not likely to have a World War II style stimulus, where the federal government was chewing up as much as 50% of the economy and running deficits in excess of 20% of GDP, unless we also have the total war.

Moreover, this implies that we had to do a really enormous amount of spending to get 10% of the potential labor force back into work.  I'd like to find some more efficient means of curing these deficiencies.  

Luckily, I think there are some ways to rehabilitate that labor.  We could, for example, replace extended unemployment benefits with a WPA-style jobs program.  We could implement a federal hiring preference for the long-term unemployed, akin to the benefit that veterans get, paired with a very lengthy probationary period in case some of the long-term unemployed are unemployed because they're lazy or useless.  We could offer to suspend payroll taxes for those who rehire the long-term unemployed: one or two months for every month of unemployment.  We could offer people in areas with very high unemployment a mobility grant to move elsewhere.  

These things would be expensive.  But they're not more expensive than having fellow citizens permanently drop out of the labor force, which costs us in three ways: first, because they are not producing anything, which makes all of us a little bit poorer; second, because they may well end up finding their way onto government benefits, such as Social Security Disability; and third, because those folks are our friends and family, and seeing them suffer makes us suffer too.  

One way of stating the American Dream is that anyone who is willing to work hard should be able to build a life that supports themselves and their families.  In the current recession, that dream is evaporating for millions of our fellow citizens.  Our first priority should be putting it back where it belongs.