The Real Cost of Long-Term Unemployment
Business + Economy

The Real Cost of Long-Term Unemployment

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Roughly 32 percent of the 14 million unemployed Americans – or 4.4 million people – were jobless for a year or more, according to a new third quarter report from the Pew Charitable Trusts. That’s a number nearly equal to the population of Louisiana.

Long-term unemployment has nearly doubled since the same period in 2009, the report said. The economic costs of chronic joblessness are much greater than in any previous recession and include the drag on consumer spending, poor credit quality and an overall drag on productivity – all of which hinder economic growth. The problem impacts all age groups. Once older workers lose their jobs, however, they’re the most likely to remain out of work for a year or longer. In the third quarter of 2011, more than 43 percent of unemployed workers older than 55 had been out of work for at least a year.

Employers added 103,000 jobs in September as the unemployment rate held steady at 9.1 percent, according to the Labor Department. The October jobs report will be out this Friday and economists expect job growth to slow slightly, to 90,000. With businesses remaining skittish about hiring because of the sluggish economic growth, many Americans continue to have a tough time finding work. Although those with more education are less likely to lose jobs, long-term joblessness is distributed across all education levels once they are unemployed, Pew found. Thirty-four percent of unemployed workers with a bachelor’s degree had been without work for a year or longer, compared with 38 percent of jobless high school graduates and 39 percent of unemployed people who hadn’t completed high school.

Spending on unemployment benefits is projected to reach $120 billion in 2011 and remains well above pre-recession years, according to the Congressional Budget Office (CBO). From 2005 to 2007, spending on unemployment ranged from $31 billion to $33 billion.

Gary Burtless, an economist with the Brookings Institution, says that it will be hard to wean Americans off long-term jobless benefits during persistently high unemployment. The federal government has been extremely generous in paying for unemployment benefits throughout this recession, he argues. 

“In every recession since 1958, the federal government has always provided extensions in benefits,” Burtless told The Fiscal Times. “What is unusual is how much the benefit generosity improved and how much of the extra cost was funded by the federal government without significant state contribution.”

Still, spending on unemployment in 2011 is about $40 billion below that spent in 2010, when it reached a peak of $159 billion, according to CBO. The slowdown in spending is due to a decline in jobless claims and new legislation in some states that reduce the number of weeks an individual can receive unemployment benefits.

Earlier this year, Michigan cut its unemployment benefits from 26 weeks to 20 weeks in an effort to help plug the state’s $1.4 billion deficit. Michigan was the first state in the country to cut benefits; since then, several other states have followed. Burtless says this effort could “blossom into a huge oak tree” as cash-strapped states try to close massive budget deficits.

While the duration of benefits varies from state to state, most allow a maximum of 26 weeks. After an unemployed individual exhausts his or her standard unemployment benefits, the federally-funded “emergency” compensation kicks in and permits maximum benefits of 99 weeks. 

As the labor market thaws and slowly adds more new jobs, more than 2.2 million individuals who are currently receiving unemployment benefits face losing them if Congress doesn’t pass an extension before the end of the year. Democrats and Republicans, of course, continue to spar over the best job creation legislation.

Burtless says Republicans will blink but it won’t be without a fight. (In 2010, Congress approved an addition of up to 73 weeks of unemployment benefits backed by the federal government.) “I don’t think we will go cold turkey,” said Burtless. “It will run out around Christmas and it will not help the case for fiscal stringency. You can’t look more Scrooge-like than allowing people’s unemployment benefits to lapse around Christmas time.”