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  • Writer's pictureMarco Annunziata

Long Term Unemployment

Greater inequality will be the heaviest legacy of the pandemic. Inequality of incomes, and of job opportunities.

Long term unemployment is a red flag. Most economists have upbeat projections for 2021 economic growth, especially in the US. They have good reasons: the economy has showed a remarkable ability to bounce back when restrictions on business activities are eased. With vaccination campaigns underway, this year we should move towards full reopening, and generous fiscal and monetary support will then boost spending and growth.

But long-term unemployment strikes the wrong note:

Last month, over 4 million people had been unemployed for 27 weeks or more – nearly four times as many as a year ago. Worse: as a share of total unemployment, long-term unemployment jumped to nearly 40%, close to the post-financial crisis peak.

Here’s another way to look at the same problem:

Unemployment spiked last April as the US economy shut down; since then, the number of short term unemployed shrank from 22 million to 6; that of long term unemployed quadrupled.

In a way this is just a mechanic feature of the recovery: as jobs come back, those still unemployed are unemployed for longer and long-term unemployment accounts for a bigger share of total unemployment.

But long term unemployment is a longer term problem:

This is the chart that worries me the most: since the early 1970s, long term unemployment has been trending up, especially as a share of total unemployment. The post-financial crisis recovery had brought it back down, but now it’s moving back up.

Or look at it like this – and tell me when you get tired of charts:

The 2010s are dominated by the global financial crisis, but the upward trend in the share of long term unemployment was already going on for a few decades.

And while the pandemic has hit the service sector the hardest, the negative impact on employment has been broader: the share of manufacturing in total employment spiked in the first lockdown phase; now it’s back around the 2018-19 level, suggesting that manufacturing employment has suffered as much as in services.

One more chart, and one more reason to worry:

The participation rate had been in structural decline since the late 1990s; it finally picked up as the recovery accelerated in late 2016; now the pandemic has pushed it down again.

Ok, no more charts. The takeaways:

  • The US labor market has been suffering from significant structural problems, flagged by the creeping rise in the share of long-term unemployed and the persistent decline in the participation rate (especially for prime-age working men). These mirror structural changes in the economy, driven by technology, global competition, and education – and contribute to growing inequality.

  • The robust 2016-2020 cyclical recovery alleviated these problems but did not cure them, then the pandemic and ensuing lockdowns inflicted a massive setback. The economy will recover again, but even a robust pickup might not be enough to fully heal the labor market. Three factors will make the difference:

  • Policy: perhaps the hardest challenge in economic policy is providing support to the unemployed without undermining work incentives; even harder when long-term unemployment rises. The current policy emphasis is on providing generous government help to compensate the impact of the shutdowns. There is a heated debate on how generous these payments should be, and how targeted. Getting the balance wrong could discourage labor market participation and exacerbate the rising trend in long term unemployment – and inequality with it.

  • Technology: scrambling to react to the pandemic, some companies have turned to technology to give workers greater flexibility, others to replace workers through automation. Overall, most companies have realized their workforce is crucial and will raise their efforts to upgrade their talent pool. But this also means that unless we help most workers move up the skills curve, more will be left behind and inequality will increase further.

  • Education: all this means that education will play an even more important role in ensuring greater and broader opportunity. The first step should be to reopen schools as quickly as possible – school closures have hurt kids from lower income backgrounds the most, undermining their long-term opportunities. Next, the school system needs to do a better job at teaching the skills needed in the economy.

Long term unemployment is not just today’s concern: it’s a longer-term issue that flags underlying problems in the labor market. Left unaddressed, they will exacerbate and entrench inequality. We should tackle them on all fronts, starting now.

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