February 16, 2012
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?
What Are the Consequences of Unemployment?
Households with unemployed workers are adversely affected by joblessness in many ways. For workers who have been displaced through no fault of their own—for example, those who lost or left a job because their plant or company closed or moved—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.
What Factors Have Caused High Unemployment?
Many factors are responsible for the rise in unemployment in general and in long-term unemployment:
- 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 for people to stay in the labor force and continue searching for work that result from extensions of unemployment insurance benefits; and
- The erosion of unemployed workers’ skills and the belief of some employers that people who have been unemployed for a long time would be low-quality 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. However, when aggregate demand ultimately picks up, as it eventually will, so-called structural factors—specifically, employer-employee mismatches, the erosion of skills, and stigma—may continue to keep unemployment and long-term unemployment higher than normal.
What Policies Would Increase Demand for Workers?
In previous work, CBO examined the possible effects of a number of policies designed to increase economic growth and employment in 2012 and 2013. Changes in tax or spending policy that would produce the largest increases in employment per dollar of budgetary cost include:
- Reducing the marginal cost to businesses of adding employees; and
- Targeting people most likely to spend the additional income (generally, people with lower income).
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. Achieving both short-term stimulus and long-term sustainability would require a combination of policies: changes in taxes and spending that would widen 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. Previously, 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 changes in those policies probably would be too small or would occur too slowly to significantly alter overall output or employment in the next two years.
What Other Policies Could Reduce Unemployment?
Lawmakers could aim to reduce unemployment by addressing factors other than weak demand for goods and services. For example, policies could:
- Improve workers’ skills through training programs (perhaps targeted at specific vocations, geographic areas, or age groups);
- Modify the unemployment insurance program to encourage unemployed people to return to work quickly, keep the unemployed connected to the workplace, or forestall job losses; or
- Facilitate transitions to work through job-search and housing mobility assistance programs.
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 most of the policies 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.
The study was prepared by Gregory Acs and William Carrington of CBO’s Health and Human Resources Division.