Long-Term Unemployment is not a short term problem

“While I do not see much evidence of any significant increase in structural unemployment so far, I am concerned that structural unemployment could increase over time if the labor market heals too slowly–a phenomenon known as hysteresis” said Bernanke at the Money Marketeers of New York University, New York, New York, on April 11, 2012.

The times is coming pretty soon when economic and monetary authorities will have to recognized that Long-Term Unemployment is not a short term problem. Only after that recognition can we expect them to out forward the remedy: active labor market policy.

Monetary and fiscal policies will never suffice to reduce long term unemploymentOne of the main policies to reduce long-term unemployment is an active labor market policy. The OECD publishes each year data on Government investments in labor market programs like training and wage subsidies. The term active programs is used to differentiate those measures from income support programs, like unemployment benefits, which are called passive labor market programs. The term passive is used to emphasize the fact that those measures do not act on employability or behaviour. They are nonetheless absolutely necessary. This is not the point.

Gemany and the Scandinavian countries are champions of active labor market policies. This is well known. But, less known  is the fact that the US are not. US investment in active labor market programs before the Great recession wasbelow the OECD average, nearly 4 times lower: 0.16% of GDP vs 0.62%.

Source: Job Market Monitor with OECD date, % of GDP, US in red

It is generally admitted by labor economists that this is not the way out of the long-term unemployment trap.

In sum, an active labor market policy in an essential part of an employment policy. Left alone, monetary and fiscal policies will never suffice to reduce long term unemployment.

Here is what Boomberg writes on Long-Term Unemployment.

If the labor market heals too slowly, the 5.1 million Americans out of work for at least six months may face declining odds of ever finding a job — leading to permanently higher unemployment, a phenomenon known as hysteresis. Bernanke says while this hasn’t happened yet — as weak growth is mainly responsible for the “elevated” jobless rate — the risk that it could bolsters his case to keep record monetary stimulus in place.

Never before in postwar America has finding work taken as long. The average duration of unemployment soared to a record 41 weeks in November and remains at 39 weeks, more than double the 15-week average since the U.S. began collecting the information in 1948, according to Bureau of Labor Statistics data compiled by Bloomberg. Those jobless for six months or longer made up 41 percent of the total.

“People are less likely to find work the longer they’re unemployed for various reasons, including contacts and skills deteriorating over time, and the more that happens, the more structural unemployment increases,” said Dean Maki, chief U.S. economist at Barclays Plc in New York.

No Evidence Yet

Vice Chairman Janet Yellen said April 11 that continued monetary accommodation is warranted because of the risk that high unemployment may cause “more persistent structural problems” if temporary joblessness becomes more permanent. While she, like Bernanke, doesn’t see any “substantial” evidence of hysteresis yet, it might occur if the labor market doesn’t heal fast enough, she said in New York.

The term hysteresis, meaning that which comes later, was used in classical physics before gaining popularity among economists to describe disenfranchised workers in periods of high unemployment, according to an entry in “An Encyclopedia of Macroeconomics” by economist Rod Cross. Referenced “occasionally” since the 1940s by Paul Samuelson, Edmund Phelps and others, it became more widely used in the 1980s, including by Olivier Blanchard and Larry Summers, Cross wrote…

via Hysteresis Undermining Labor Pattern Becomes Bernanke Fed Focus – Bloomberg.

Related articles

• Bernanke | No evidence of any significant increase in structural unemployment (jobmarketmonitor.com)
• Active Labour Market Policy | Profiling potential long-term unemployment at the individual level (jobmarketmonitor.com)
• Labor Market Policies and Unemployment (jobmarketmonitor.com)
• Long-term unemployment : almost 30% of jobless in U.S. (jobmarketmonitor.com)