Tag Archives: Long-Term Unemployment

Why the long-term unemployed matter

L-T - unemployedTim Harford wrote an interesting piece about the long-term unemployed in the FT Magazine last year. In the US during the great recession unemployment reached over 10% yet it was the long-term unemployment (being unemployed for more than 6 months) figures which were very concerning. Normally you would find that long-term unemployment figures wouldn’t reach above 20% of all those unemployed but during the great recession the figure got to 45%.

Research has shown that people who have been out of work for more than six months have been marginalised: employers ignore them, bidding up wages if necessary to attract workers from the ranks of the short-term unemployed. Also one experiment found that employers were three times more likely to call an applicant with irrelevant but recent employment experience, than someone who had relevant experience but who had been out of work for more than six months.

Problems with being long-term unemployed:

Workers become less motivated after continued failed attempts to gain employment and therefore are less active in the job and emotionally drained
Benefits become an attractive alternative – depends on the country.

Solutions

According to Tim Harford the right wing policy is a tough love approach to cut benefits and entice them off the sidelines before they become unemployable

The left wing approach is that the long-term unemployed are the victims of circumstance and need support.

Structural Unemployment

In a lot of countries today the labour market has not been hit by overgenerous benefits but by a structural shift in the economy away from construction. The supply of jobs no longer matches the supply of workers = Structural Unemployment.

AS Unit 5 – State of Global Unemployment

In Unit 5 of the Cambridge AS course unemployment is a significant area of study. It is also important that you are up to date with current trends worldwide. In the OECD the average unemployment rate was 7.9% whilst the eurozone area showed 11.1%. There are two main features of this unemployment – youth unemployment and those who are long-term unemployed. The graph below shows figures that range from 4.4% in Japan and 24.6% in Spain.

Youth Unemployment
This is a major problem especially for those that are unskilled and looking for employment in blue collar jobs. These countries with high youth unemployment have experienced long-term consequences, particularly for those with limited education. Brian Gaynor in the New Zealand Herald mentioned some consequences of youth unemployment from various sources. They include:

* Being unemployed young resulted in lower earnings by 8.4% – 13% in future years.
* A 1% increase in US unemployment resulted in a 6-7% decrease in the wages of college graduates.
* Youth unemployment raised the probability of unemployment in later life
* Loss of earning up to 21% at age 41 for workers who experienced unemployment in early adulthood.
* Unemployment in early 20’s affected earnings, health and job satisfaction up to two decades later.

Long-Term Unemployed

According to the OECD and since the GFC the rise in numbers who have been unemployed for over one and two years are as follows:
1 year – 1.6% to 2.9%
2 years – 0.9% to 1.5%

One of the major issues that a lot countries face is the number of baby boomers that are remaing in the workforce after 65 and the impact this will have on youth unemployment. Furthermore, it is interesting to note from the OECD that labour’s share of national income in its 34 countries has declined from 66.1% to 61.7% in the last 10 years. According to Brian Gaynor the decline in labour’s share is due to a number of factors:

* Greater productivity gains
* Increased mobility and transfer of low-skilled activities from developed to emerging countries
* Weaker trade unions – impacts bargaining powers
* Privatisation – newly privatised companies are more profitable and have fewer employees

Minimum Wage Increase?

The OECD argue against a higher minimum wage as it will increase prices. Also in the long-term firms respond by increasing productivity levels beyond the wage rise which leads to a decline in labour usage and therefore a greater emphasis on capital.

US Beveridge Curve – a concern for long-term unemployment.

I did an earlier post on the Beveridge Curve which explained what it shows – The Beveridge curve plots the job openings (vacancy) rate against the unemployment rate. It is downward sloping as job vacancies tend to be low when unemployment is high and vice versa. As you can see from the chart the pink dots indicate that job vacancies are not being taken by those who are unemployed which indicates that there is a mis-match in the US labour market. This suggests that structural unemployment is on the increase and unlike cyclical unemployment cannot be reduced by an expansionary monetary policy. Simply put easing monetary policy to reduce structural unmeployment will just create inflation. As cyclical unemployment becomes structural this does have implications for long-term unemployment and the natural rate of unemployment – that is the level of unemployment that is achievable without generating inflation.

Structural Unemployment – Unemployment arising from changes in demand or technology which lead to an oversupply of labour with particular skills or in particular locations. Structural unemployment does not result from an overall deficiency of demand and therefore cannot be cured by reflation, but only by retraining or relocation of the affected work-force, some of which may find work at low wages in unskilled occupations.