U.S. CONGRESSIONAL BUDGET OFFICE | How To Respond to Persistently High Unemployment

The rate of unemployment in the United States has exceeded 8 percent since February 2009, making the past three years the longest stretch of high unemployment in this country since the Great Depression. CBO projects that the unemployment rate will remain above 8 percent until 2014. The share of unemployed people who have been looking for work for more than six months—referred to as the long-term unemployed—topped 40 percent in December 2009 and has remained above that level ever since.

In a study requested by the Ranking Member of the House Committee on Ways and Means, CBO examines the following questions:

  • What are the consequences of unemployment?
  • What factors have caused high unemployment?
  • What policies would increase demand for workers?
  • What other policies could reduce unemployment?

(Adapted excerpts by Job Market Monitor to follow)

The past three years have been the longest stretch of high unemployment in U.S.  since the Great Depression. Moreover, the Congressional Budget Office (CBO) projects that the unemployment rate will remain above 8 percent until 2014.

Compounding the problem of high unemployment, the share of unemployed people looking for work for more than six months—referred to as the long-term unemployed—topped 40 percent in December 2009 for the first time since 1948, when such data began to be collected; it has remained above that level ever since.

Such persistently high unemployment has wide-ranging repercussions: It places financial, psychological, and even physical strains on people who are unable to find work and on their families as well; it places budgetary pressures on the federal government and on state and local governments, as tax revenues decline and expenditures increase; and it results in a long-term erosion of skills that will
reduce the nation’s productivity and people’s income in the future.

The report examines a broad array of policy approaches designed to reduce unemployment. Some of those policies would aim to boost the economy and
demand for goods and services, reflecting the fact that the increase in unemployment in general and long-term unemployment in particular is primarily attributable to weak demand for labor, which, in turn, is the result of weak aggregate demand. Policies to increase demand for workers could reduce unemployment substantially in 2012 and 2013, although those policies could be costly to the federal government and would vary greatly in their effectiveness per dollar of budgetary cost.

Other policies that CBO examined, including worker training, changes to the unemployment insurance (UI) system, and helping the unemployed transition to new jobs, would probably not have a significant effect on the overall unemployment rate during the next two years, primarily because of their limited scope, but they could provide support to certain groups and have longer-run positive effects.

Unemployment and Its Consequences

Households with unemployed workers are adversely affected by joblessness in many ways. For workers who have been displaced through no fault of their own — specifically, who lost or left a job because their plant or company closed or moved, because there was insufficient work for them to do or because their position or shift was abolished—the drop in earnings associated with losing a job during a recession may persist for many years, even when these workers eventually find a new job. Older workers and those with long tenure in their previous job are especially vulnerable because new jobs for those workers typically pay less and offer less potential for earnings growth. Other types of unemployed workers—for example, people entering the labor market for the first time (typically after completing school)—are also adversely affected by a weak economy. People who start their career in times of high unemployment tend to have persistently lower earnings than their counterparts who begin seeking work under better economic circumstances.

In addition to its immediate and lasting effects on earnings and family finances, unemployment is also correlated with deteriorating mental and physical health and with increased mortality. A parent’s job loss can lead to worse schooling outcomes for children and, ultimately, to worse labor market outcomes for those children once they become adults. In those and other ways, unemployment is costly for many households, and the adverse effects are probably worse for those unemployed for an extended period.

Factors Causing High Unemployment

Many factors are responsible for the rise in unemployment in general and in long-term unemployment in particular. Explanations include the following:

  • Weak demand for goods and services, as a result of the recession and its aftermath, which results in weak demand for workers;
  • Mismatches between would-be employers’ needs and the skills or location of the unemployed;
  • Incentives from extensions of unemployment insurance for people to stay in the labor force and continue searching for work; and
  • The erosion of unemployed workers’ skills and the belief held by some employers that people who have been unemployed for a long time would be lowquality workers (a phenomenon sometimes called stigma).

Slack demand for goods and services (that is, slack aggregate demand) is the primary reason for the persistently high levels of unemployment and long-term unemployment observed today, in CBO’s judgment; other factors appear to play smaller roles. However, when aggregate demand ultimately picks up, as it eventually will, socalled structural factors—specifically, employer-employee
mismatches, the erosion of skills, and stigma—may continue to keep unemployment and long-term unemployment higher than normal.

Policies to Increase Demand for Workers

In previous work, CBO examined the possible effects of a number of policies designed to increase output and employment in 2012 and 2013.

Those fiscal policy actions were intended to increase demand for goods and services and raise employment in three key ways: by boosting households’ disposable income, by providing support to businesses, and by increasing aid to state governments or government spending on infrastructure.

Initiatives that would reduce the marginal cost to businesses of adding employees or that would target people most likely to spend the additional income (generally, people with lower income) would have the largest effects on employment per dollar of budgetary cost in 2012 and 2013, CBO found. Policies primarily affecting businesses’ cash flow would have little impact on their marginal incentives to hire or invest and, therefore, would have only small effects on employment per dollar of budgetary cost.

Despite the near-term economic benefits, such actions would add to the already large projected budget deficits that would exist under current policies, either immediately or over time. Unless other actions were taken to reverse the accumulation of government debt, the nation’s output and people’s income would ultimately be lower than they otherwise would have been. To boost the economy in the near term while seeking to achieve longterm fiscal sustainability, a combination of policies would
be required: changes in taxes and spending that would increase the deficit now but reduce it later in the decade.

Lawmakers could also influence employment—and unemployment—during the next few years by changing policies that do not involve, or whose scope extends well
beyond, taxation and government spending. In its previous work, CBO considered some potential changes in regulatory and other policies related to energy and the
environment, the financial and health care sectors, and international trade. In CBO’s judgment, the economic effects of the changes in regulatory policies or other types
of policies that the agency examined—apart from fiscal policies—probably would be too small, or would occur too slowly, to significantly alter overall output or employment in the next two years.

Other Policies to Reduce Unemployment

Lawmakers could aim to reduce unemployment by addressing factors other than weak demand for goods and services. In this report, CBO examines initiatives that
would take the following approaches:

  • Improving workers’ skills, 
  • Modifying the unemployment insurance program, or
  • Facilitating transitions to work.

Examples include training programs (perhaps targeted at specific vocations, geographic areas, or age groups); changes to unemployment insurance to encourage unemployed people to return to work quickly, keep the unemployed connected to the workplace, or forestall job losses; and programs such as job-search assistance and housing-mobility assistance that help the unemployed
transition to new jobs and locations. Such policies could be implemented using mechanisms ranging from providing funding through block grants to direct federal operation. But such policies would probably not have a significant effect on unemployment over the next two years, primarily because the policies the agency examined could probably not be implemented on a sufficiently large scale
during that time. However, by reducing the extent of unemployment and long-term unemployment in the future, they might have longer-term benefits.


Read More @ Understanding and Responding to Persistently High Unemployment 



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