Long-Term Unemployed Likely to Return to Job Market, Study Finds – Real Time Economics

The long-running debate about the causes of America’s high rate of long-term unemployment is far from settled. A new working paper from the National Bureau of Economic Research wades into the discussion and its findings fall squarely on the side of those who see the labor market’s woes as a product of a weak business cycle.

The other so-called structural explanation is that a mix of demographic shifts and the deep recession could have done permanent damage to the labor force, meaning no amount of policy support, fiscal or monetary, could lift employment growth back to its historical trend. Some Federal Reserve officials, including Richmond Fed President Jeffrey Lacker, have favored such explanations.

The NBER paper’s authors, led by Kory Kroft of the University of Toronto, aren’t buying that argument. “Compositional shifts in demographics, occupation, industry, region and the reason for unemployment jointly account for very little of the observed increase in long-term unemployment,” they write.

For one thing, long-term joblessness–defined as unemployment for 27 weeks or more–increased “for virtually all groups” as opposed to affecting a specific part of the population or income strata. The long-term unemployed accounted for 32.8 percent of the unemployed in June, down from 34.6% in May. The rate is now way down from the peak of 45% in September 2011, but still roughly double the rates that prevailed in the three years before the 2008 financial crisis.

The recent decline has encouraged some economists at the Fed that long-term unemployment may not be as intractable a problem as some have suggested.

Kroft and his co-authors come to a similarly positive conclusion, countering recent research from former Obama administration adviser and Princeton University economist Alan Krueger, who sees the long-term jobless as a case apart, sidelined for so long that they are much less likely to find jobs than those employed for shorter periods even when growth picks up.

“Shifts in observable characteristics of the unemployed do not go very far in accounting for the rise in long-term unemployment,” the authors say.

The new research supports the view embraced by Fed Chairwoman Janet Yellen and some other Fed officials and economists that millions of the long-term unemployed can be drawn back into steady work if the economy strengthens, and therefore could be helped by continued central bank efforts to spur growth.



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31 July 2014 | 11:01 am – Source: blogs.wsj.com

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