Long-Term Unemployment Poses a Big Problem for the U.S.

Long-term unemployment could potentially create even longer-term problems for the nation's budget deficit and the quality of the U.S. workforce. With more than 6.1 million workers reporting that they've been unemployed for more than 26 weeks, the long-term unemployed represent 40.9% of the 14.8 million unemployed workers in March, one of the highest levels ever. The average duration of unemployment for this group is now 29.7 weeks -- nearly seven months.

Funding unemployment benefits for such a large group is a huge undertaking. Congress has been battling in recent weeks over passage of a bill extending unemployment benefits through the end of this year, and the cost of maintaining those benefits is beginning to take on the magnitude of a taxpayer bailout -- of the taxpayers.

"Unemployment benefits are a big driver of the budget deficit," says Brian Bethune, chief financial economist at IHS Global Insight. Bethune points out that not only has the unemployment rate spiked from 7.2% in January 2009 to 9.7% in March 2010, but the time that people are spending unemployed has also increased significantly. "It's the combination of the [unemployment] rate going up and the average length people receive benefits that make it a bad news story," he said

Bethune said that from October 2009 through the end of February 2010, the government spent $114.9 billion on all unemployment benefits. During the same period in the previous fiscal year, the government spent $37.7 billion. "If we continue to spend at that rate, for the full year we would be close to $250 billion."


"A Lot of Industries ... Are Recalibrating"

While no one wants to strip away the safety net that unemployment benefits provide for hardworking Americans, no one wants to keep adding to the nation's projected $1.6 trillion budget deficit either. It is estimated that extending benefits for the long-term unemployed through December will add $66 billion to the 2010 deficit. Maintaining extended benefits on such a large scale for several years is unsustainable.

Unfortunately, the country may not have much choice but to maintain unemployment benefits at the expense of the deficit. The Obama administration's economic advisers and other economists have projected that unemployment will stay in the 10% range throughout 2010, and will remain above 7% through 2013.

If unemployment remains high for such an extended period, there could be negative consequences for the nation's workforce. "There are a lot of industries that are recalibrating how much output they can produce and how many people they can employ," says Christopher Woock, research associate at the Conference Board who co-authored a recent report on the labor market's recovery from the current recession. "There is going to be some significant reallocation of workers across industries, and so we are going to have this period when people are going to have to reassess and find employment opportunities in other industries."

The ability and willingness to find opportunities in alternative industries is the main challenge for the long-term unemployed. Workers must be willing to abandon their chosen profession and employers must be willing to take on workers who may not have the traditional skill-sets they are used to. While there are indications that hiring is about to pick up, it is not yet clear there will be enough jobs for the massive amounts of workers who must change industries. The longer they remain out of work, the harder it will be for them to transition to new jobs.

A Long Stretch From Higher Productivity to Increased Hiring

"People that are unemployed tend to get de-skilled," says Bethune. "Anytime you go through a recession and there is an extended time of unemployment, there is a dead-weight loss of skills."

Bethune said there is a risk that many of the long-term unemployed will ultimately become unemployable and have to move down the employment ladder or have to be re-trained for other jobs. "De-skilling leads to a reduction of the production potential of the labor force, and that is not good."

Employers have enjoyed increasing profits last year due to improved productivity levels of workers. Worker output per hour grew by 6.9% in the fourth quarter of 2009, the seventh consecutive quarter of productivity increases. The hope is that this increased productivity will ultimately lead employers to expand operations, which will lead to job creation across industries. As employers create more jobs, some of the long-term unemployed will transition to those new jobs, reduce the cost of unemployment benefits and dampen the possibility of large-scale de-skilling.

Unfortunately, it may take years to create enough jobs to make a real difference. Global Insight projects modest hiring of about 850,000 workers for all of 2010. The Obama administration's Council of Economic Advisers projects the economy will create an average of 95,000 jobs per month through the end of 2010. Woock says that even at the pre-recession job creation rate of 157,000 per month, it would take six years to recover the jobs that have been lost, add jobs for new workers entering the labor force, and bring the unemployment rate down to 5%.

"We expect unemployment to be high for quite some time," he said.